- #1
ussername
- 60
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Thread moved from the technical forums, so no Homework Template is shown
Consider a five-year, 1000 dollars bond with a 5% coupon rate and annual coupons. If this bond is currently trading for a price of 957.35 dollars, what is the bond's yield to maturity?
F = 1000 dollars
c = 0.05
P = 957.35 dollars
N = 5 years
y = ?
I used the formula presented here for the yield-to-maturity calculation. The equation looks like this:
$$957.35 = \frac{1050}{(1+y)^5} + \frac{50}{(1+y)^4} + \frac{50}{(1+y)^3} + \frac{50}{(1+y)^2} + \frac{50}{(1+y)}$$
From that y = 6%.
What is the meaning of that number (6%)? The cash-flow is:
Buy the bond: -957.35 dollars
Receive first coupon after 1 year: 50 dollars
Receive second coupon after 2 years: 50 dollars
Receive third coupon after 3 years: 50 dollars
Receive fourth coupon after 4 years: 50 dollars
Receive fifth coupon and nominal value after 5 years: 1050 dollars
I cannot obtain 6% when dividing any combination of these numbers. So what is the meaning of that 6%?
F = 1000 dollars
c = 0.05
P = 957.35 dollars
N = 5 years
y = ?
I used the formula presented here for the yield-to-maturity calculation. The equation looks like this:
$$957.35 = \frac{1050}{(1+y)^5} + \frac{50}{(1+y)^4} + \frac{50}{(1+y)^3} + \frac{50}{(1+y)^2} + \frac{50}{(1+y)}$$
From that y = 6%.
What is the meaning of that number (6%)? The cash-flow is:
Buy the bond: -957.35 dollars
Receive first coupon after 1 year: 50 dollars
Receive second coupon after 2 years: 50 dollars
Receive third coupon after 3 years: 50 dollars
Receive fourth coupon after 4 years: 50 dollars
Receive fifth coupon and nominal value after 5 years: 1050 dollars
I cannot obtain 6% when dividing any combination of these numbers. So what is the meaning of that 6%?