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Tulips and Company bonds pay semiannual interest of 5%, they mature in 15 years and have a par value of $1000
Tulips and Company bonds pay semiannual interest of 5%, they mature in 15 years and have a par value of $1000. The market rate of interest is 8%. What is the market value of Tulip bonds?
ABC's $1000 par value bonds currently sell for $798.50. The coupon rate is 10%, paid semi-annually. If the bonds mature in 5 years, what is the yield to maturity on these bonds?
Expert Solution
Computation of Market Value of Tulip Bonds using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Market Value of Bonds = ?
Rate = 8%/2 = 4% compounded semiannually
Nper = 15 years * 2 = 30 Periods
PMT = $1,000*5% = $50
FV = $1,000
Substituting the values in formula:
=-pv(4%,30,50,1000)
PV or Market Value of Bonds = $1,172.92
Computation of Yield to Maturity on Bonds using Rate Function in Excel:
=rate(nper,pmt,-pv,fv)*2
Here,
Rate = Yield to Maturity = ?
Nper = 5 years*2 = 10 Periods
PMT = $1,000*10%/2 = $50
PV = $798.50
FV = $1,000
Substituting the values in formula:
=rate(10,50,-798.50,1000)*2
Rate or Yield to Maturity on Bonds = 16%
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