bond yields


6. Bond Yields – A Japanese company has a bond outstanding that sells for 87 percent of its ¥100,000 par value. The bond has a coupon rate of 5.4 percent paid annually and matures in 21 years. What is the yield to maturity of this bond?

Answer:

Price = 87% x ¥100,000 = ¥ 87,000
Note: Bond price ¥ 87,000 < ¥100,000, meaning bond sells at discount (less than par), so C < R.
Assume that R must be more than 5.4%.

¥ 87,000 = ¥ 5,400 (PVIFAR%, 21) + ¥ 100,000 (PVIFR%, 21)
Since we cannot solve the equation directly for R, using a spreadsheet, a financial calculator, or trial and error, we find:
R = 6.56%
Since the coupon payments are annual, this is the yield to maturity.


16. Bond Yields – Hacker Software has 7.4 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 96 percent of par.  What is the current yield on the bonds? The YTM? The effective annual yield?

Answer:

P0 = $960 = $37 (PVIFAR%, 18) + (PVIFR%, 18)
Using a spreadsheet, financial calculator, or trial and error we find:
R = 4.016%
This is the semiannual interest rate, so the YTM is:
YTM = 2 x 4.016%= 8.03%
The current yield is:
Current yield = Annual coupon payment/price = $74/$960 = 0.0771 or 7.71%
The effective annual yield is the same as the EAR, so using the EAR equation:
Effective Annual Yield = (1 + 0.04016)2 – 1 = 0.0819 or 8.19%


17. Bond Yields – Pembroke Co. wants to issue new 20 – year bonds for some much needed expansion projects. The company currently has 10 percent coupon bonds on the market that sell for $1,063, make semiannual payments, and mature in 20 years. What the coupon rate should the company set on its new bonds if it wants them to sell at par?

Answer:

P= $1,063 = $50 (PVIFAR%, 40) + $1,000 (PVIFR%, 40)
Using a spreadsheet, financial calculator, or trial and error we find:
R = 4.650%
This is the semiannual interest rate, so the YTM is:
YTM = 2 x 4.650% = 9.30%

Reference: Chapter 8, Corporate Finance Book, Stephen A.Ross, Randolph W.Westerfield and Jeffrey Jaffe, Ninth Edition.

Comments

Jimmy He said…
I still don't understand problem 1. what do i type on the financial calculator?