question archive Tool are considering the purchase of a bond that pays If percent coupon interest per year, pald semlannually (le
Tool are considering the purchase of a bond that pays If percent coupon interest per year, pald semlannually (le
Subject:AccountingPrice:9.82 Bought3
Tool are considering the purchase of a bond that pays If percent coupon interest per year, pald semlannually (le., 51 percent per semiannual perlod ). The bond matures In 15 years and has a face value of $1,000. If the current market price of the bond Is $931.176, the yleld to maturity (or Err) Is calculated as follows : 931 176 = (1,000 (0.11 ))/2(PVA 12,15 2 + 1,000 (PV 1 /2.15 (1 Solving for ym , the yield to maturity (or expected rate of return ) on the bond is 12 percent 3 Equivalently you would be willing to buy the bond only If the required rate of return ( ) was no more than 12 percent .
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Using Excel, you can use this formula:
=RATE(30;55;-931.176;1000;0)
=6%
But since this 6% is based on semi-annual payment terms, we convert it to annual by multiplying it by 2. Now we get 12%.
Step-by-step explanation
Based on the formula above:
30: payment period computed as 15yrs times 2. This is to align with the semi-annual interest payment totaling to 30 payment periods.
55: semi-annual interest payment computed as 1000 times 11% times 1/2
-931.176: Present value as given in the problem. We needed to put a negative sign so Excel can differentiate this from future value.
1000: Future value as given in the problem
0: We input 0 if payment is made at the end of the period, which is our assumption unless stated otherwise in the problem.
