1) Computation of Yield to Maturity using Rate Function in Excel:

=rate(nper,pmt,-pv,fv)*2

Here,

Rate = Yield to Maturity = ?

Nper = 15 years*2 = 30 Perods

PMT = $1,000*6%/2 = $30

PV = $1,000

FV = $1,000

Substituting the values in formula:

=rate(30,30,-1000,1000)*2

Rate or Yield to Maturity = 6%

This is neither premium bond nor discount bond. It is a par bond since the yield to maturity of the bond is the same as the coupon rate.

 

2) Computation of Price of Bond using PV Function in Excel:

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

 

When Yield to Maturity is 5.5%:

Here,

PV = Price of Bond = ?

Rate = 5.5%/2 = 2.75%

Nper = 12 years*2 = 24 periods

PMT = $1,000*5%/2 = $25

FV = $1,000

Substituting the values in formula:

=-pv(2.75%,24,25,1000)

PV or Price of Bond = $956.50

 

 

When Yield to Maturity is 6%:

Here,

PV = Price of Bond = ?

Rate = 6%/2 = 3%

Nper = 12 years*2 = 24 periods

PMT = $1,000*5%/2 = $25

FV = $1,000

Substituting the values in formula:

=-pv(3%,24,25,1000)

PV or Price of Bond = $915.32

 

% Change in Price = ($915.32-$956.50)/$956.50 = -4.30%

There is an inverse relationship between yield to maturity and price of bond. If the yield to maturity is higher, the price of bond will be lower and vice versa.