5. Consider a 5% coupon bond with 5 years to maturity and $1,000 face value. a. What should the price of the bond be if the yield to maturity is 10% b. Alternatively assume the price of the bond is $900. What is the yield to maturity

a. 810.46

b.7.47%

Explanation:

The yield to maturity, book yield or redemption yield of a bond or other fixed-interest security, such as gilts, is the internal rate of return earned by an investor who buys the bond today at the market

DATA

Par value = $1000

coupon = 5% x 1000 = $50

Number of Years = 5

Requirement a)

If ytm of 10%

price of Bond = PV of Coupons + PV of Par Value

price of Bond= 50*((1-(1+10%)^-5)/10%) + 1000/(1+10%)^5

price of Bond =810.46

Requirement  b)

YTM using Financial Calculator

N = 5; PMT = 50; PV = -900; FV = 1000; CPT I/Y =7.47%

YTM = 7.47%

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