SUBMITED TO: MA,AM MEHWISH AZIZ KHAN

SUBMITTED BY: MUQADDAS ZULFIQAR

MIS ID: 30101
SUBJECT: INTRODUNCTION TO BUSINESS FINANCE

Assignment # 5

Question No 1
Bond Yields Watters Umbrella Corp. issued 12-year bonds 2 years ago at a
coupon rate of 7.8 percent. The bonds make semiannual payments. If these
bonds currently sell for 105 percent of par value, what is the YTM?

Answer:

Step 1:
Yield to maturity (YTM) is the anticipated rate of return if the bond is held until
maturity. It is expressed as an annual rate. And it accounts for what all the bond
future coupons payments are worth today at the present value.

Calculate the YTM of a 12-year bond using the following values and formula
as shown in the following Table 1:
1 Bond details: YTM
2 Face value $1,000 FV =C3
3 Bond selling price =C3 * 105% PV =(-C4)
4
Coupons rate ( semi - 0.078 NPE =(C6*2)
annually ) R

5
Year to maturity =12-2 PMT =(C3*C5)/2

6 YTM =Rate(E5,E6,
E4,E3)*2

Table 1
YTM is calculated using the RATE function in excel. It will appear as follows:
RATE (Nper, pmt, pv, fv, type, guess). As it is a semi-annual bond, NPER will be
the twice of years to maturity, PMT is the semi-annual coupon paymments (Face
value multiplied by coupon rate), thus divided by 2. PV is the present value or
market price of the bond. F is the face value of the bond. Put the respective values
in rate function. Leave type and guess blank.
After substituting the formula in excel, the values will appear as shown in the
following
1 Bond detail: YTM
2 Face value $1,000 FV $1,000
3 Bond selling price $1,050 PV -
$1,050
4 Coupons rate (semi- annually)
7.8% NPER 20
5 Year to maturaty
10 PMT 30

6 YTM 7.093%

Table 2
Therefore as per the calculation done in the table 1 and table 2 the yield of maturity
 YTM of the bonds is 7.093%

Question No 2
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:

Step 1
Yield to maturity is the expected rate of return on the bonds held till it
maturity.
YTM=(C+(FV-PV)/n)÷((FV-PV)/2)
Where,
PV is the present value of the bond. C is the annual coupon payment. YTM is the
yield to maturity. FV is the future value or face value. n is the number of years.

Step 2
A J's Company sells its bond for 87%of ¥100,000 face value. The coupon rate is
5.4% compounded annually and the maturity is 21 years.
Calculate the yield to maturity as follows:
YTM = ( C+( FV - PV)/n) ÷ ((FV-PV)/2)
={(5.4%*¥100,000)+[¥100,00-((87%*¥100,000)/21)]}÷{[¥100,000+((87%*
¥100,000)/2)]}

YTM = [¥5,400+((¥100,000-¥87,000)/21)]÷[(¥100,000+¥87,000)/2]
YTM = [¥5,400+(¥13,000/21)]÷[(¥187,000/2)]
YTM = [¥5,400+¥619.0476]÷[¥93,500]
YTM = [¥6019.048]÷[¥93,500]
YTM = 0.064375 or 6.44%

Question No 3
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?
Answer :

Step 1
The given data is summarized as:
Coupon rate = 7.4%
Years to Maturity =9 years
The Bond makes semi-annual payments.
Selling Price of the bond = 96% of Par

Step 2
Calculation of YTM:

The interest payment are done semi

Annual so rate = 7.4% / 2. = 3.7%
Yield to maturity
= [ semi annual interest payment + (principle payment - price of bond)/no of years
to maturity] ÷ [ 0.6( price of the bond) + 0.4( principle payment)]
YTM = [ $37+($1000-$960)/18] ÷ [ 0.6($960)+ 0.4($1000) ]
YTM = [ 37 + (40/18) ] ÷ [ 576 + 400 ]
YTM = [ 37 + 2.222 ] ÷ [ 976 ]
YTM = 0.040186
Semiannual interest rate is 4.0186%
So YTM is :
YTM = 0.040186 × 2
YTM = 0.080372

Step 3
Calculation of current yield:
Current yield = annual coupons payment / price
Current yield = $74 / $960
Current yield = 0.07708

Question No 4
Coupon Rates Rhiannon Corporation has bonds on the market with 13.5
years to maturity, a YTM of 7.6 percent, and a current price of $1,175. The
bonds make semiannual payments. What must the coupon rate be on these
bonds?

Answer
Step 1
Here we need to find the coupon rate of the bond. All we need to do is to set up the
bond pricing equation and solve for the COupon payment as follows:
P= $1,175 C(PVIFA3.8%,27)+ $1,000(PVIF3.8%,27)
Solving for the coupon payment, we get
C= $48.48
Since this is the semiannual payment, the annual coupon payment is:
2x $48.48 = $96.96
And the coupon rate is the annual coupon payment divided by par value, so
Coupon rate $96.96/ $1,000 = .09696

Question No 5
Valuing Bonds Even though most corporate bonds in the United States make
coupon payments semiannually, bonds issued elsewhere often have annual
coupon payments. Suppose a German company issues a bond with a par value
of €1,000, 15 years to maturity, and a coupon rate of 8.4 percent paid annually.
If the yield to maturity is 7.6 percent, what is the current price of the bond?

Answer :

Rate 8.6% (indicates YTM)

Nper = 25 (indicates the period of the bonds)
FV = 1000 (indicates face value)
PMT = 1000*7.5% = 75 (indicates interest payment)
PV = ? (indicates current price)
Current Price = PV(Rate,Nper PMTFV)
=PV(8.6%,25,75,1000) = 888.35

Question No 6
A $1,000-face-value bond has a current market price of $935, an 8 percent
coupon rate, and 10 years remaining until maturity. Interest payments are
made semiannually. Before you do any calculations, decide whether the yield
to maturity is above or below the coupon rate. Why?
What is the implied market-determined semiannual discount rate (i.e.,
semiannual yield to maturity) on this bond?
Answer

Face value of bond = $1000

Current market price of bond = $935
Coupons rate = 8%
Semmi annual coupon rate = 4%
No of year till maturity = 10 years
n No of period till maturity of bond = 2×10 ( semi-annual)
= 20
YTM is the above coupons rate because current market period is less than face
value ie 935 is less than 1000 which means the bond is at discount at when bond is
in discount YTM of bond is greater than coupon rate.
Implied market obtained annual determined semi-annual discount rate = ?
Ie semi-annual YTM = ?

Market price of bond

= [ coupon / ( 1 + YTM )^1] + [ coupon / ( 1 + YTM )^2] + [ coupon / ( 1 +
YTM )^3 ] +.................... [ (Coupon + face value ) / ( 1 + YTM )^n]

935= [ 40 / ( 1 + YTM )^1] + [ 40 / ( 1 + YTM )^2] + [ 40 / ( 1 + YTM )^3 ]

+.................... [ (40 + 1000) / ( 1 + YTM )^20]

Let as assume YTM of bond = 4.49968% ( hit a trail method)

935= [ 40 / ( 1 +4.49968% )^1] + [ 40 / ( 1 + 4.49968% )^2] + [ 40 / ( 1 +

4.49968% )^3 ] +.................... [ (40 + 1000) / ( 1 + 4.49968% )^20]

935 = 935