Consider the following data on various bonds trading at t = 0. Bond Coupon Rate
ID: 2771968 • Letter: C
Question
Consider the following data on various bonds trading at t = 0.
Bond
Coupon Rate
Payment Frequency
Face Value
Time ot Maturity
Price at t=0
(per $1000 face value)
A
7%
4 times a year
$1000
8 years
?
B
12%
once a year
$1000
2 years
1100
C
0
2 times a year
$1000
5 years
700
The prices are all ex-coupon. That is, they are the price you would pay immediately after the coupon has been paid. Thus, when you pay that price, you will receive the next coupon one period later.
a. What is the yield to maturity on Bond C? Show your work.
Bond
Coupon Rate
Payment Frequency
Face Value
Time ot Maturity
Price at t=0
(per $1000 face value)
A
7%
4 times a year
$1000
8 years
?
B
12%
once a year
$1000
2 years
1100
C
0
2 times a year
$1000
5 years
700
Explanation / Answer
Bond C is a zero coupon bond. Therefore,
Price of bond = Maturity / (1+YTM/2)No. of years*2
=> $700 = $1000 / (1+YTM/2)5*2
=> YTM = 7.26%
So, the yield to maturity for bond C is 7.26%
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