Question

The market price of a Rs. 1,000 per value bond carrying a coupon rate of 14 percent and maturing after five years is Rs. 1050. What is the yield to maturity (YTM) on this bond? What is the approximate YTM? What will be the realized yield to maturity if the reinvestment rate is 12 percent?

Answer 1

Answer:

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Answer 2

The Yield To Maturity of the bond is 12.68%.

GIVEN: Bond of market price as Rs.1000
TO FIND: Yield to Maturity                
SOLUTION:

According to the question,
Present value of bond = 1,050

Future value at the time of redemption = 1,000

Number of years = 5

Coupon Rate of bond =14%X1000 = 140

Therefore,

CPT Yield to Maturity = 12.59%

Now, for approximate Yield to Maturity,

Approx YTM​      = C + F-P/N

                                F + P/2

                           = 140−10

                              1025

                           = 130/1025

                           = 12.68%

Therefore,

Approximate Yield to Maturity = 12.68%

Also,

Realized yield of the bond =  1,000 X (1+YTM(realized))²

                                            =1,050

(1+YTM (realized) = 1.024

YTM (realized) = 2.46%

2.46% < YTM ( for 12%)

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