A. 2-4: Use the correct formula but forget to semi-annualize the annual rate before using For instance, for bonds with A rating, the yield for 2-year maturity is 5.13%; and for 20 years, it is 5.82%. (3.6) Which comes first in the market for U.S. Treasury bonds: (a) Spot interest rates or yields to maturity? For noncallable bonds, the yield to maturity and … YIELD TO MATURITY OF THIS BOND (YOU DON’T HAVE TO COMPUTE THE EXACT FIGURE). However, the final answer for each problem is found without rounding during any step in the problem. Second, the yield is higher for riskier bonds. Price and yield move in opposite directions; if interest rates rise, the price of the bond will fall. 1. The current yield is based on the price while the coupon rate is based on par. (a) The 5-year spot rate (= yield) is 0.0362. Problem 10: expected inflation this year = 3% and it will be a constant but above 3% in year 2 and thereafter; r* = 2%; if the yield on a 3-year T-bond equals the ... Yield to maturity (YTM): the return from a bond if it is held to maturity Example: a 10-year bond carries a 6% coupon rate and pays interest semiannually. There will be a loss of capital which causes the yield to be below the current yield. First write down the formula for yield to maturity: 1000 = 1000 10% Solutions to Questions and Problems 2. Exercise 4. The yield rises from 5.06% to 5.20% when the rating drops from AAA to A. We have to calculate the yield to maturity as if we were calculating the bond’s IRR. 1. Suppose you purchase the bond at a price of $1000, what is the yield to maturity? This is because the fixed coupon payments determined by the fixed coupon rate are not as valuable when interest rates rise—hence, the price of the bond decreases. (b) The yield-to-maturity is below the current yield, because the bond is selling above par. IRR stipulates the following relationship between price and yield. (b) Bond prices. Consider 5-year bonds. A 30-year bond with a 10% coupon B. Problem 2. Solve for y and yield to maturity=2y: (6 points) 6: Use the correct formula and correctly specify coupon payment, principal, semiannual rate, as well as yield to maturity. Bond’s duration will be equal to its term to maturity if and only if it is a zero coupon bond; The duration of perpetual bond is equal to (1+r)/r, where r=current yield of the bond’ Longer a coupon paying bond’s term to maturity, the greater the difference between its term to maturity and duration. The price of a pure discount (zero coupon) bond is the present value of the par value. A 20-year bond with a 9% coupon C. A 20-year bond with a 7% coupon D. A 10-year zero-coupon bond 2. Yield to maturity is a complicated average of the separate spot rates of interest. Problem Set #13 Solutions 1. The following R code computes the Since the coupon payments are annual, this is the yield to maturity. The yield to maturity is the interest ra te of the bond. Solutions to Problem Set 2 CorporateFinance,Sections001and002 1. 7. (b) Bond prices or yields to maturity? The yield to maturity is the required rate of return on a bond expressed as a nominal annual interest rate. Duration and YTM are inversely related. All other things equal (YTM = 10%), which of the following has the longest duration? Rem ember that we defined yield to maturity as the IRR of the bond. Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and yield to Solution: (a) Spot interest rates. bond. Basic. Financial Economics Yield to Maturity Calculating the Yield to Maturity Hence one calculates the yield to maturity as the discount rate R that makes the current bond price equal to the present value of the payments. First, the longer maturity bonds of the same quality rating have a higher yield. Solutions Manual 8. Solutions to Questions and Problems 1. ; if interest rates or yields to maturity is the required rate of return a. 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