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Calculating the Bond Price, YTM and YTC

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Problem 1
Suppose a corporation's bonds have 8 years remaining to maturity. In addition, suppose the bonds have a $1000 face value, and the coupon interest rate is 7%. The bonds have a yield to maturity of 10%. Complete parts (a) and (b) below.
a) Compute the market price of the bonds if interest is paid annually.
b) Compute the market price of the bonds if interest is paid semiannually.

Problem 2
Suppose a corporation's bonds have a current market price of $1400. The bonds have a 13% annual coupon rate, a $1000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 107% of face value. Complete parts (a) through (c) below.
a) Compute the bonds' current yield.
b) Compute the yield to maturity.
c) Find the yield to call, if the bonds are called in 5 years.

Problem 3
A company has a bond issue outstanding that pays $150 annual interest plus $1000 at maturity. The bond has a maturity of 10 years. Compute the value of the bond when the interest rate is 5%, 9%, and 13%. Describe the pattern and the type of risk that may apply.

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Solution Preview

Please refer attached file for better clarity of functions in MS Excel.

Problem 1
Suppose a corporation's bonds have 8 years remaining to maturity. In addition, suppose the bonds have
a $1000 face value, and the coupon interest rate is 7%. The bonds have a yield to maturity of 10%. Complete parts (a) and (b) below.

a) Compute the market price of the bonds if interest is paid annually.

Number of periods=NPER=8
Maturity amount=Face Value=FV=$1,000
Coupon amount=PMT=1000*7%=$70
YTM=RATE=10%
Type of payment=TYPE=0 Coupon is paid at the end of period

Current Market price can be found by using PV function in MS Excel.
Current Market Price=PV=($839.95) =PV(E10,E7,E9,E8,E11)
Current Market Price=$839.95

b) Compute the market price of the bonds if interest is paid semiannually.

Number of periods=NPER=8*2=16 Coupon is paid semiannually
Maturity amount=Face Value=FV=$1,000
Coupon amount=PMT=1000*7%/2=$35
YTM=RATE=10%/2=5% Semi annual
Type of payment=TYPE=0 Coupon is paid at the end of period

Current Market price can be found by using PV function in MS Excel.
Current Market Price=PV=($837.43) ...

Solution Summary

There are 3 problems. Solutions to these problems depict the methodology to calculate the bond price, yield to maturity and yield to call.

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See Also This Related BrainMass Solution

Yield to Maturity and Yield to Call

Delta Industries has just issued callable ten-year, 8% coupon bonds with semi-annual coupon payments. The bonds can be called at par in four years or anytime thereafter on a coupon payment date. The current bond price is $1000. For an investment today in these bonds (assuming no transaction costs):

a. What is an investor's Yield to Maturity?
b. What is an investor's Yield to Call?

Two years ago, Delta Industries issued callable fifteen-year, 7% coupon bonds at par value of $1,000 per bond with annual coupon payments. The bonds have just completed their second coupon payment. The bonds can be called at par five years from the date of issue or anytime thereafter on a coupon payment date. It has a current price of $1100. For an investment today in one of these bonds (assuming $15 in transaction costs):

c. What is an investor's Yield to Maturity?
d. What is an investor's Yield to Call?

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