A 4 year bond pays a 725 coupon rate and is currently priced

A 4 year bond pays a 7.25% coupon rate and is currently priced at $900. What is the YTM of this bond? Assume semi-annual coupon payments and par value of $1,000. (Please show the work I do not seem able to use the correct formula to get any of the answers.

7.25%

8.06%

3.6125%

10.36%

	A.	7.25%
	B.	8.06%
	C.	3.6125%
	D.	10.36%

Coupon rate = 7.25%
Price of Bond = 900
Maturity = 4
No of coupon payment (n)= 2* 4 = 8( Semi-annual payments)
Coupon = Par value * Coupon rate/2 = 1000 * 7.25%/2 = 36.25

By using YTM formula we get
Approximate semi-annual YTM formula = (Coupon + (Face value - Price)/n)/((Face value + Price)/2) =(36.25 + (1000 -900)/8)/((1000 + 900)/2) = 10.26% (which will not give accurate results)

For accurate results we should use IRR function in Excel as follows?

Option d is correct option
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		A	B	C	D	E	F	G	H	I
1	Periods of Payment	0	1	2	3	4	5	6	7	8
2	Initial Bond Price	-900
3	Coupon		36.25	36.25	36.25	36.25	36.25	36.25	36.25	36.25
4	Par value at end of Term									1000
5	Total Receipt	-900	36.25	36.25	36.25	36.25	36.25	36.25	36.25	1036.25
	IRR(Half yearly YTM)	5.184%	IRR(A5:I5)
	Yearly YTM = Half yearly YTM * 2	10.367%

A 4 year bond pays a 7.25% coupon rate and is currently priced at $900. What is the YTM of this bond? Assume semi-annual coupon payments and par value of $1,000

A 4 year bond pays a 725 coupon rate and is currently priced

Solution

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