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    Bonds- YTM, coupon rate, interest rate risk

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    1. Skitman Corp. issued 12-year bonds 2 years ago at a coupon rate of 9.2 percent. The bonds make semiannual payments. If these bonds currently sell for 104 percent of par value, what is the YTM?

    2. Interpreting Bond Yields: Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond then? The YTM?

    3. Interest Rate Risk: Bond J is a 4 percent coupon bond. Bond K is a 12 percent coupon bond. Both bonds have eight years to maturity, make semiannual payments, and have a YTM of 7 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? What if rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower-coupon bonds?

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    Solution Preview

    The answers are in the attached file.

    1. Skitman Corp. issued 12-year bonds 2 years ago at a coupon rate of 9.2 percent. The bonds make semiannual payments. If these bonds currently sell for 104 percent of par value, what is the YTM?

    Yield to maturity

    Yield to maturity can be calculated using Excel worksheet function RATE

    Data
    No of years to maturity= 10 =12-2
    Coupon rate= 9.20%
    Face value= $1,000
    Frequency = S Semi annual coupon payments
    Redemption value = $1,000
    Price of the bond= $1,040.00 =104%*1000
    Interest payment per year= $92.00 =9.2% x 1000
    Interest payment per period= $46.00 =92/2
    No of Periods =n= 20 =2x10

    Yield= 8.60% (Using EXCEL Function RATE)

    =2x RATE(20,46,-1040,1000)

    We multiply by 2 as the rate calculated is for semiannual period

    We can also use approximation formula:

    Coupon @ 9% = 92
    Par /Face value= 1000
    Redemption value= $1,000
    Maturity= 10 years
    Price= $1,040.00

    Therefore , yield= 8.63% =(92+(1000-1040)/10)/(0.5*(1000+1040))

    Answer: YTM= 8.60%

    2. Interpreting Bond Yields: Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is ...

    Solution Summary

    Calculates YTM, coupon rate and interprets the interest rate risk of lower-coupon bonds.

    $2.19

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