Chapter 10, Problem 28PS

Summary Introduction

(a)

To calculate:

Yield to maturity for two-year bond where bond with par value$\$1000$making annual payment of$\$100$is priced at$\$1000$.

Introduction:

Yield to maturity is the expected rate of return on a held to maturity bond. However, it is the internal rate of return only in case of held to maturity bond as it makes the present value of future cash flows of bond and its current price equal.

b.(i)

Summary Introduction

To calculate:

Compound yield to maturity fora two-year bond where bond with par value$\$1000$making annual payment of$\$100$is priced at$\$100$if one-year interest rate in next year turns out to be$8\%$.

Introduction:

Yield to maturity is the expected rate of return on a held to maturity bond. However, it is the internal rate of return only in case of held to maturity bond as it makes the present value of future cash flows of bond and its current price equal.

b.(ii)

Summary Introduction

To calculate:

Compound yield to maturity fora two-year bond where bond with par value$\$1000$making annual payment of$\$100$is priced at$\$100$if one-year interest rate in next year turns out to be$10\%$.

Introduction:

Yield to maturity is the expected rate of return on a held to maturity bond. However, it is the internal rate of return only in case of held to maturity bond as it makes the present value of future cash flows of bond and its current price equal.

b.(iii)

Summary Introduction

To calculate:

Compound yield to maturity fora two-year bond where bond with par value$\$1000$making annual payment of$\$100$is priced at$\$100$if one-year interest rate in next year turns out to be$12\%$.

Introduction:

Yield to maturity is the expected rate of return on a held to maturity bond. However, it is the internal rate of return only in case of held to maturity bond as it makes the present value of future cash flows of bond and its current price equal.