Valuing bonds (calculating annual yield-to-maturity and fair
These are the prices for zero coupon bonds per $1,000 of face value:
Maturity Price
1 yr $951.5
2 yr $895.6
3 yr $825.4
Show all work and formulae
a) What is the annual yield-to-maturity of each bond if the yield is compounded annually? Show work and formulas
b) Consider the prices of zero coupon bonds above, what is the fair price of a coupon bond that pays a coupon of $10 at year 1, $10 at year 2, $10 at year 3 and repays the principal of $100 at year 3?
c) What is the annual yield-to-maturity of the coupon bond in b)?
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These are the prices for zero coupon bonds per $1,000 of face value:
Maturity Price
1 yr $951.50
2 yr $895.60
3 yr $825.40
Show all work and formulae
a) What is the annual yield-to-maturity of each bond if the yield is compounded annually? Show work and formulas
yield to maturity (YTM) = (face value / price) ^ (1/n)- 1
where n= years to maturity
^ means raised to the power of
Face value= $1,000
Maturity Price YTM
1 $951.50 5.10% =($1,000. / $951.5)^(1/1)-1
2 $895.60 5.67% =($1,000. / $895.6)^(1/2)-1
3 $825.40 6.61% =($1,000. / ...
Solution Summary
Values bonds by calculating annual yield-to-maturity and fair price.
Problems on interest rate and yield to maturity
Interest rate and yield to maturity. You can use excel or financial calculator:
1. What is the fair value of a 2-year $100,000 T-note with no coupon payment if the current market interest rate is 10%?
2. If you obtain a 30 year mortgage loan of $100,000, find your monthly payment if annual interest rate is 3%, 5%, 10%.
3. You want to buy a 10% coupon bond with a face value of 100000 that yields 6% to maturity of 5 years. What is the price of the bond you want to buy?