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Bond Problems
Bond Problems
Bond Problems
Price of a bond
P = C (1 - 1 ) + FV
(1+i)n (1 + i )n
i
YTM
YTM = C + FV - MP
n
FV + MP
2
YTC = C + CP - MP
n
CP +MP
2
Bond Problems
1) A bond with 3 years to maturity has a face value of Rs. 1,000. The bond
pays a 9 percent semiannual coupon, and the bond has a 10 percent nominal
yield to maturity.
What is the price of the bond today?
P = C (1 - 1 ) + FV
(1+i)n (1 + i )n
i
= 45 ( 1 - 1 ) + 1000
(1.05)6 (1.05)6
0.05
= 45 ( 1 - 1 ) + 1000
1.34 1.34
0.05
= 45(0.254) + 746.27
0.05
= 228.6 + 746.27
= ₹ 974.87
= 45 + 1000 - 1100
8
1000 + 1100
2
= 45 - 12.5 = 3.10 % ( semi annual) = 6.20 % (annual)
1050
YTC = C + CP - MP
n
CP +MP
2
= 45 + 1040 -1100
4
1040 +1100
2
= 45 - 15
1070
= 30 = 2.80 % (semi annual)
1070
= 5.60 % (annual )
The bond will be called as it is a premium bond and YTC < YTM
3) A corporate bond with a Rs. 1,000 face value pays a Rs. 55 coupon every six
months. The bond will mature in 4 years, and has a nominal yield to maturity
of 10 percent. What is the price of the bond ?
P = C X (1- 1 ) + FV
(1 + i)n (1 + i)n
i
= 55 x (1 - 1 ) + 1000
(1.05)8 (1.05)8
0.05
= 55 x (1 - 1 ) + 1000
1.4774 1.4774
0.05
= 55 x 0.1231 + 676.84
0.05
= 17.77 + 676.84
0.05
= 355.40 + 676.84
= ₹ 1032.32
4) A corporate bond has a face value of Rs. 1,000, and pays a Rs. 40 coupon
every six months (that is, the bond has a 8 percent semiannual coupon). The
bond matures in 5 years and sells at a price of Rs. 1,100. There is a call option
after 2 years at a price of Rs. 1050. What is the bond’s nominal yield to maturity?
What is the yield to call? Will the bond be called if interest rates do not change?
YTM = C + FV - MP
n____
FV + MP
2
= 40 + 1000 - 1100
10
1000 + 1100
2
= 40 - 10 = 30
1050 1050
= 2.86 % (semi annual)
= 5.72 % (annual)
The bond will be called as it is a premium bond and YTC < YTM