INVESTMENT ANALYSIS - YIELD TO MATURITY, CURRENT YIELD AND NOMINAL YIELD

The Other Woman In Marriage Corporation’s N1,000 Bonds that pays a coupon rate of 8 percent in a single annual payment and mature in 20 years are selling for a current market price of N1,050.  What does an investor in these bonds earned in terms of;

1.       Yield –To-Maturity

2.       Current Yield

3.       Nominal Yield 

SOLUTION

Before I start solving, I will urge you to always get a paper, pen and calculator to practice all calculations posted by me so that it can be part of you. 

So, let’s do this guys.

1.                   To determine the nominal yield/annual coupon payment, here is the formula – cram it.

C=i(FCV)

i= Interest rate which is 8% in the question above

FCV=Face value which is N1,000 in the question above

Po = Market Price which is N1,050 in the question also

n=Maturity period which is 20 years still from the question.

Now, pick your calculator;

C=0.08 (1,000) = N80

The nominal yield is N80

Explanation:

0.08 is the 8% which I converted.  This is how you convert 8/100 = 0.08.  that is how I got that.

The (1,000) is just the Face Value from the question ok.

2. To determine the current yield (Y), here is the formula.

Y = C

     PO   Y is yield and C is the nominal yield we just solved 4

Y = 80  = 0.0762 = 7.62%

    1,050

Explanation: 80 is the nominal yield while 1,050 is the face value from the question.  Convert back your answer to percentage by doing this – 0.0762 x 100 = 7.62%

3.                   To determine the yield-to-maturity, here is the formula again.

YTM = C + (FCV – Po)

                        n

               ½ (FCV + Po)

YTM means yield to maturity and ½ is constant in the question.

YTM = 80 + (1,000 – 1,050)

                               20

             ½ (1,000 + 1,050)

YTM = 80 – 2.5 = 77.5

            1,025        1,025

YT = 0.0756 = 7.56%. Again, this was converted to percentage.

Explanation: You know how we got our 80 – is the same 80.  1,000 is the face value minus 1050 which is the market price will give you -50.  Then divide it by 20 which is the number of years or period, you will get -2.5.  80 +-2.5 give you.  Remember, we have one below to solve which is ½ (1000+1050).  Frist calculate the 1000 +1050 you will get 2,050.  Then ½ x 2050 will give us 1025 which will be below the answer of 77.5 according to the formula arrangement.

That is it guys.