A 6 year, $1,000 IBM bond pays interest of $80 annually and currently sells for $950. What are its coupon rate, current yield, and yield to maturity?
Present Value of Annuity Problem?
03
Mar
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yousedummy
March 3, 2010 at 11:54 pm
Coupon Rate: Annual payout as a percentage of the bond’s par value
Current Yield: Annual payout as a percentage of the current market price you’ll actually pay
Yield-to-Maturity: Composite rate of return off all payouts, coupon and capital gain (or loss)
Coupon rate = 80/1000 = 8%
Current Yield = 80 / 950 = 8.42%
Yield to maturity = 9.11%
Year Cashflow
0 -950
1 80
2 80
3 80
4 80
5 80
6 1080
YTM 9.11%
Addendum: Perhaps they should teach attention to details in today’s MBA programs…
mba_101
March 4, 2010 at 12:37 am
coupon rate = 80/1000 = 8%
current yield = 80/950 = 8.42%
ytm – use financial calculator
-n=8
-pv= -950
-pmt=80
-fv= 1000
-i/y (ytm) = ? = 8.9%
Proof that ytm = 8.9%
80/1.089^1 + 80/1.089^2 + 80/1.089^3 + 80/1.089^4 + 80/1.089^5 + 80/1.089^6 + 80/1.089^7 + 1080/1.089^8 = 950
Yield to Maturity is the discount rate at which all future cash flows are discounted to arrive at the present value. In this case, if you discount all future cash flows at 8.9% for the number of years they are out in the future, you’ll arrive at a present value of $950. Note the payment in year 8 (1080/1.089^8). This payment is $1080 because you get your $80 interest payment, plus the $1000 par value back.