FIN630 Assignment # 2 Solution

Solution Assignment 02
FIN 630
Marks=10
What will be the relationship among coupon rate, current yield, and yield to
maturity for bonds selling at discounts from par?
Illustrate using the 8% (semiannual payment) coupon, 30-year maturity bond with
par value of Rs. 1,000 paying 60 semiannual payments of Rs 40 each assuming it is
selling at a yield to maturity of 10%.
Yield to maturity exceeds current yield, which exceeds coupon rate.
Take as an example the 8% coupon bond with a yield to maturity of 10% per year (5%
per half year). Its price is Rs. 810.71.
Po=Σ Ct/ (1+r)t + Par/(1+r)n
= Rs. 40 X Annuity factor (5%, 60) + Rs. 1,000 X PV factor (5%, 60)
= Rs. 757.17 + Rs. 53.54
= Rs. 810.71
and therefore its current yield is 80/810.71 = 0.0987 or 9.87%, which is higher than the
coupon rate but lower than the yield to maturity.