## Bond Yields 5-Minute Work-out

Created by Pamela Peterson Drake

Calculate the yield-to-maturity for the bonds with the following characteristics:

 Problem Price Face value Years to maturity Coupon rate(semi-annual compounding) Yield-to-maturity a \$900 \$1,000 5 6% b \$1,100 \$1,000 5 6% c \$850 \$1,000 10 4% d \$980 \$1,000 8 2% e \$550 \$500 6 6%

## Solutions to Bond Yield 5-minute Work-out

 Problem PV FV T CF Calculated r(6 mo. rate) Yield-to-maturity a \$900 \$1,000 10 \$30 4.248% 8.496% b \$1,100 \$1,000 10 \$30 1.893% 3.786% c \$850 \$1,000 20 \$20 3.009% 6.018% d \$980 \$1,000 16 \$10 1.137% 2.275% e \$550 \$500 12 \$15 2.051% 4.103%

Hints & notes:

1. Using a financial calculator: if you get an error message, the most likely cause is that you must enter the PV as a negative number (that is, change the sign).
2. The coupon rate is used only to determine the periodic cash flow. It is not the yield and should not be confused with "r" in the formula.
3. The most common mistake in an exam situation is to forget to translate a six-month yield into the equivalent annual yield-to-maturity (that is, multiply by two). The custom on Wall Street is to refer to bond yields in annualized terms.
4. The coupon (the periodic cash flow) is calculated as a percentage of the face value of the bond. In the case of the last bond, the coupon per year is 6% of \$500, or \$30, and the periodic cash flow is \$15 (every 6 months).