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).