PDA

View Full Version : Bonds Yield to Maturity


Will2412
Jul 24, 2011, 05:10 PM
I have this hw problem that I have been working on. I have a check answer of 8.65% but in my attempts to try and solve I have come up with 8.38% and 9.13%. I know Im doing something wrong but can't figure it out. Can someone plese help. I need to wrap this up tonight.

You just purchased a bond that matures in 5 years. The bond has a face value of $1000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bonds yield to maturity?

Just Looking
Jul 24, 2011, 07:07 PM
I'm not coming out with 8.65% either. I even used a bond calculator and came out with 8.39%

Bond Yield Calculator (http://www.moneychimp.com/calculator/bond_yield_calculator.htm)

Doing it manually, I came out with 8.37%, If you want to show your work, I'll see if you are understanding the process.

Will2412
Jul 24, 2011, 07:29 PM
Here is my latest attempt. Still didn't achieve the check answer given in the text.
Face Value = $1000 Coupon = 8% annually or $80 Current yield = 8.21%
8.21% = ($80 / Price paid for bond) x 100%
(8.21 / 100) = (($80 / Price paid for bond) x 100%) / 100
.0821 = $80/ Price paid for bond
Price paid for bond today= $80 / .0821 = $974.42
YTM = [$80 + ($1000 - $974.42)/5] / ($1000 + $974.42)/2
YTM = 85.116/987.21 = .0862 or 8.62%

Just Looking
Jul 24, 2011, 08:06 PM
Wow - I've been on the computer all weekend working with budgets, etc - too many numbers. I missed the 5 years - somehow used 10 years.

Anyway, you are right just the way you did it. I think it must just be rounding differences.

Will2412
Jul 25, 2011, 06:21 AM
Thank you

wirelessany1
Jan 21, 2013, 11:48 AM
For the benefit of anyone who comes along later, this is how the problem is answered. First you have to find the present value.

annual interest / current yield = PV
80 / 8.21% = $974.42

now solve in Excel

=rate(5,80,-974.42,1000)

Yield to Maturity = 8.65%