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Bond Pricing and Yield Calculations

The document contains examples of bond valuation calculations. It provides the steps to calculate the current price of a bond given its coupon rate, years to maturity, face value, and current yield. It also shows how to calculate the realized return on a bond that was purchased and later sold. Finally, it demonstrates calculating the current stock price of a growing company by discounting its expected future dividends.

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Arjun Sathyanarayan
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57 views2 pages

Bond Pricing and Yield Calculations

The document contains examples of bond valuation calculations. It provides the steps to calculate the current price of a bond given its coupon rate, years to maturity, face value, and current yield. It also shows how to calculate the realized return on a bond that was purchased and later sold. Finally, it demonstrates calculating the current stock price of a growing company by discounting its expected future dividends.

Uploaded by

Arjun Sathyanarayan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Practice Problems (Ch.

6,8)
Find the current price for a bond with a 10% annual coupon rate, 15 years to
maturity, and a face value of $1,000. The current yield to maturity of 8.5%.

PV =
C
r [
1−
1
]
n
+
FV
n
=
100
( 1+r ) (1+r ) 0.085
1−
[ 1
( 1+0.085 ) 15
]
+
1000
(1+r )
15

=1124.2
Alternatively, using a financial calculator:
PMT=100, N=15, I/Y=8.5, FV=1000
 PV= -1124.5
Consider a two-year bond with a 10 percent coupon and face value of $1,000 that
currently sells at $1,035.67. What is this bond’s current yield (CY)?
Current yield=Coupon payment/PV
=100/1035.67
=9.65%

Suppose that on January 1, 2019, you purchased 6.375 coupon Government of


Canada bond with semi-annual payments, face value of 1000 and a maturity date
of December 31, 2026.
At that time, the YTM was 5%, and you paid $1,089.75 (the PV of the bond).
Six months later (July 1, 2019), you sold the bond when the YTM was 4%.
What is your realized return?
Total number of payments: 16
Number of payments left after six month (on July 1, 2019): 15
Discount rate (semi-annual): 4%/2=2%
Annual coupon payment = 6.375%*1000=$63.75
Coupon every six month = 63.75/2=31.875
Coupon payment every six month: 6.375%*1000/2=31.875

PV =
C
r [
1−
1
n
+
]
FV
( 1+r ) (1+r )n
=
31.875
0.02 [
1−
1
1.02
15 ]
+
1000
1.02
15

=1152.59
Alternatively, using a financial calculator:
PMT=31.875, N=15, I/Y=2, FV=1000
 PV= -1152.59
P 1+C−P 0 1152.59+ 31.875−1089.75
Realized return = P0
=
1089.75
=8.69 %

The Bell Weather Co. is a new firm in a rapidly growing industry. The company is
planning on increasing its annual dividend by 20% a year for the next four years
and then decreasing the growth rate to 5% per year. The company just paid its
annual dividend in the amount of $1.00 per share. What is the current value of
one share if the required rate of return is 9.25%?
Year 0 1 2 3 4 5 …
1 1.2 1.44 1.728 2.0736 2.177 …

¿5 2.177
P4 = = =51.23
r−g 0.0925−0.05
1.2 1.44 1.728 2.0736+51.23
P 0= + + + =41.04
1.0925 1.0925 2 1.09253 1.0925
4

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