 Business
1 October, 15:52

# Arjen owns investment A and 1 bond B. The total value of his holdings is 2,607 dollars. Investment A is expected to pay annual cash flows to Arjen of 342.76 dollars per year with the first annual cash flow expected later today and the last annual cash flow expected in 7 years from today. Investment A has an expected return of 14.48 percent. Bond B pays semi-annual coupons, matures in 20 years, has a face value of \$1000, has a coupon rate of 5.98 percent, and pays its next coupon in 6 months.What is the yield-to-maturity for bond B? Answer as a rate in decimal format so that 12.34% would be entered as. 1234 and 0.98% would be entered as. 0098.

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1. 1 October, 19:44
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0.0782

Explanation:

First and foremost we need to determine the price of investment A in order to ascertain the price of Bond B as well:

The price of investment A is the present value of its cash flows.

price of investment A=\$342.76+\$342.76 / (1+14.48%) ^1+\$342.76 / (1+14.48%) ^2+\$342.76 / (1+14.48%) ^3+\$342.76 / (1+14.48%) ^4+\$342.76 / (1+14.48%) ^5+\$342.76 / (1+14.48%) ^6+\$342.76 / (1+14.48%) ^7=\$ 1,791.31

Price of Bond=total value of holdings-price of investment A=\$2,607-\$1,791.31=\$ 815.69

The yield to maturity on Bond can be determined using rate formula in excel:

=rate (nper, pmt,-pv, fv)

nper is the number of coupon payments which 20*2=40

pmt is the semiannual coupon=\$1000*5.98%*6/12 = \$29.9

pv is the current price of \$815.69

fv is the face value of \$1000

=rate (40,29.9,-815.69,1000) = 3.91%

Annual yield=3.91% * 2=7.82%