C C C+ M

Bo= n
+ n
+....+
( 1+ r ) ( 1+r ) (1+r )n

Bo Present value of=the bond

C Coupon /=
Interest payments

= to maturity)
r required return (yield

M =Par value
n = number of periods to maturity

M 1,000
=
C (par value=x coupon rate) = (1,000 x 5%) = 50
n5 =
r = 4.5%

M
Bo=
( 1+ r )n

Bo Present value of=the bond

= to maturity)
r required return (yield

M =Par value
n = number of periods to maturity

M 1,000
=
n8 =
r = 6%
Bo

Coupon rate / 2

C =
(par value x coupon rate) = (1,000 x 5%/2) = 25

Each year x 2
Yield to maturity/2

50 50 1,000+50
Bo= + +
( 1+ 0.045/2 ) 1(2)
(1+ 0.045/2 ) 2(2)
( 1+0.045 /2 )3 (2)
 M −CP
C+
n
YTC =
M +CP
2
YTM = Yield to maturity

C Coupon / =
Interest payments
M par value =
CP = Call price of the bond
n = number of periods to call

M 200,000
=
C (par value=x coupon rate) = (200,000 x 10%) = 20,000
n5 =
Bo = 170,500
 200,000−170,500
20,000+
5
AYTM =
200,000+170,5000
2

25,900
¿
185,250

AYTM =13.98 % or 14%

number of days since the last payment
Accrued interest =Coupon payment x
number of days∈the coupon bond

Coupon payment = 1,000 x 8% = 20

90
Accrued interest =40 x
100
Accrued interest =20

Dirty price = Clean price + Accrued interest

= 1,000 + 20

Dirty price = 1,020

Question:

1. Which of the following statements are true regarding bond valuation and YTM?

I. When yield to maturity decrease. It is favorable to investors holding a bond and Unfavorable if

buying.

II. the value of bond decreases when the yield to maturity Increases.

Yield to maturity Decrease: Value of Bond prices rise. Favorable if holding a bond and Unfavorable if buying
a bond.
A

B. II, III, IV,VII

YTM = CR If YTM equals the coupon rate, the bond is priced at par
YTM > CR If YTM is higher than the coupon rate, the bond is priced above par (at a premium).

YTM < CR If YTM is lower than the coupon rate, the bond is priced below par (at a discount).