YTM

[badatfinance]

Hello,

Hoping you can help me, I can't seem to find straight forward answers for YTM and as I study by distance and have a huge weakness in finance.... I am in big trouble!

1.1  Solve the Following Problem
A 2-year maturity bond with a face value of $1,000 makes annual coupon payments of $80 and selling at $1,080.

a)   What is the current yield of the bond?      
Current Yield = Annual Bond Coupon/Current Bond Price
Current yield = 80 / 1000
= 8%
     
b) What is the yield to maturity (YTM) of the bond?
1080 = 80/ 1+8
???

c)   What is the price of the bond if inflation is expected to increase interest rate by 2 percent?  
       
Not sure on formula, please help?

Thanks in advance.

 

[Denis]

Hard to know what to "show" you...
Anyhow, this is the "cash flow" created by the bond:

 NOW      1yr      2yr
(1080)    80     80+1000

This means that NOW, the bond can be purchased for $1080, and that
the purchaser will collect $80 in 1 year, then $1080 in 2 years.

The PV (present value) of an amount A is : PV = A / (1 + i)^n :
i = interest rate, n = number of periods (in this case, periods = years)

So with your bond, we have
1080 = 80 / (1+i) + 1080 / (1+i)^2
To get rate, you need to solve that for i

A way I like is: let a = 1+i ; then equation becomes:
1080 = 80 / a + 1080 / a^2 ; multiply by a^2:
1080a^2 = 80a + 1080
1080a^2 - 80a - 1080 = 0 ; divide by 40:
27a^2 - 2a - 27 = 0

That's a simple quadratic: solve it for a.
Then substitute in a = 1+i

Hope that helps.

 

[PennyLessFinancier]

Hello,

Hoping you can help me, I can't seem to find straight forward answers for YTM and as I study by distance and have a huge weakness in finance.... I am in big trouble!

1.1  Solve the Following Problem
A 2-year maturity bond with a face value of $1,000 makes annual coupon payments of $80 and selling at $1,080.

b) What is the yield to maturity (YTM) of the bond?
1080 = 80/ 1+8
???

Not sure on formula, please help?

Thanks in advance.

Maturity Value or Par Value of the Bond is $1,000
Market Price of the Bond is $1080
Interest is $80 thus Coupon Rate is 8%
Years to Maturity are 2

To do this manually will require a bit of work, if you want me to show you how to work it out numerically then let me know and I will post it later

To find YTM with MS Excel , you can use the Rate function this way

=RATE(2,80,-1080,1000)
3.77%

 

[Denis]

Hey Buddy, you're activating old threads...what's your purpose?

 

[PennyLessFinancier]

Hey Buddy, you're activating old threads...what's your purpose?

Hi Denis

I joined this forum today and seen many posts that were left unanswered or the answers given were outright wrong.

I would think that providing a correct answer is better than leaving one unanswered or even better than one that is wrong

???

 

[Denis]

I see your "thinking", BUT whoever posted the original would be "long gone",
thus unaware of your post; you'd be losing your time...

 

[PennyLessFinancier]

I see your "thinking", BUT whoever posted the original would be "long gone",
thus unaware of your post; you'd be losing your time...

Your forum is bit lonely, you need more people to regularly post their problems here

How do you spread the word for your forum on the web, is it good old SEO work. I know this much competition on math related help is stiff on Search engines. I at one time had developed 26 graphing , scientific and statistical applets but hey not many people came to visit the pages. The old timers from Japan and US who had their applets since 1997 are on high on SERPS and I never made anywhere close to their rankings. Cutting the long story short, I had to kill the pages and sold the applets for a whopping $650, it is like saying Texas Instrument sold its graphing calculator division to the Aussies for Whopping $650

I keep myself busy creating Financial calculators these days. Learned whole lot of stuff in the past year or so that keeps me thinking of ever new ideas. I am thinking about diversification in other areas like Health and Engineering and by the end of May will have a sub domain for new Health related calculators

Got to kill time some how when you are contained in a space where you don't want to be

 

[Denis]

NO comments.
I'm just someone who visits this site, helping if I can.