Question

Watters umbrella corp. Issued 15 year bonds 2 years ago at a coupon rate of 5.9 percent. The bonds make semi-annual payments. If these bonds currently sell for 105 percent of par value, what is the ytm?

Answer 1

Current Price = 105 [ Assumed Face value = 100]  

Remaining life to maturity = 10 years [ Period = 20 ]  

Redeemable value =  100 Coupon payment = 7.8 / 2 = 3.9

Semi - Annual YTM = [3.9 + ( 100-105 ) / 20 ] / (100+105) / 2 = .03561 [i.e. 3.561%]  

Annual YTM = 3.561 X (12/6) = 7.12%

Answer 2

Watters Umbrella Corp. issued 20-year covering bonds 2 years back at a coupon rate of 8.9 percent.

The bonds provided a semiannual system of payments.These bonds currently valued at  110 percent of par value.

YTM of the bond is the internal rate of return, IRR of the cash flows related to the bond in case it is purchased today and held till maturity.

Hence, YTM is calculated as :

Hence, 1100 = 1000/(1+r)^36 + 44.5*((1+r)^36-1))/((r*(1+r)^36))