FIN630 Investment Analysis and Portfolio Management Assignment 2 (June 2010)

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Question 1
What will be the relationship among coupon rate, current yield, and yield to maturity for bonds selling at discounts from par?

When the Bonds selling at discount from par then relations is as follows
YTM>current yield>coupon yield


Question 2
Illustrate the aforementioned relationship and provide supporting calculations 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%. (Marks=8)

Bond price=(1000*8%)/2*{1-(1/(1+10%/2)^2*30)/0.05}+1000/(1+10%/2)^30*2

Bond Price=(40*{1-1/(1.05)^60/0.05)+1000/(18.679)

=(40*{(1-0.054)/0.05)}+53.536

=40*18.92+53.536

=756.8+53536


Bond Price =810.336

Current yield=par or face value*coupon rate/price

=1000*.08/810.33

=9.86

if bond is selling at discount then YTM is greater than current yield and current yield is greater than coupon yield,

Coupon rate<current yield<YTM
8% <9.86%<10%