Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 4: Q.21 (page 134)

Consider a coupon bond that has a \(900 par value and a coupon rate of 6%. The bond is currently selling for \)860.15 and has two years to maturity. What is the bond’s yield to maturity?

Short Answer

Expert verified

Yield to maturity is 8.4%

Step by step solution

01

Step 1. Introduction

Bonds are debt instruments that are issued by governments or businesses to raise funds. Bu purchasign a bond, an invest lends money to the issuer. In return, the investor gets the principal amount along with the interest at the maturity of the bond.

02

Step 2. Explanation

YTM=C-Facevalue-PricenFacevalue+Price2=54-900-860.152900+8602=0.008399%=8.39%Approx=8.4%

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

True or False: With a discount bond, the return on the bond is equal to the rate of capital gain.

Suppose today you buy a coupon bond that you plan to sell one year later. Which part of the rate of return formula incorporates future changes into the bond’s price?

Assume you just deposited \(1,250 into a bank account. The current real interest rate is 1%, and the expected rate of inflation over the next year is 5%. What nominal interest rate should the bank charge you over the next year? How much money will you have at the end of one year? If you are saving to buy a motorbike that currently sells for \)1,300, will you have enough money to buy it?

What is the yield to maturity on a \(10,000-face-value discount bond, maturing in one year, which sells for \)9,523.81?

The U.S. Treasury issues some bonds as Treasury Inflation Indexed Securities, or TIIS, which are bonds adjusted for inflation; hence the yields can be roughly interpreted as real interest rates. Go to the St. Louis Federal Reserve FRED database, and find data on the following TIIS bonds and their nominal counterparts. Then answer the questions below.

  • 5-year U.S. Treasury (DGS5) and 5-year TIIS (DFII5)
  • 7-year U.S. Treasury (DGS7) and 7-year TIIS (DFII7)
  • 10-year U.S. Treasury (DGS10) and 10-year TIIS (DFII10)
  • 20-year U.S. Treasury (DGS20) and 20-year TIIS (DFII20)
  • 30-year U.S. Treasury (DGS30) and 30-year TIIS (DFII30)

a. Following the Great Recession of 2008– 2009, the 5-, 7-, 10-, and even the 20-year TIIS yields became negative for a period of time. How is this possible?

b. Using the most recent data available, calculate the difference between the yields for each of the pairs of bonds (DGS5 – DFII5, etc.) listed above. What does this difference represent?

c. Based on your answer to part (b), are there significant variations among the differences in the bond-pair yields? Interpret the magnitude of the variation in differences among the pairs.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free