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KIC000052 - Using Equations to Find YTM Citicorp Example...

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Citicorp Example • WallStreetJournal reports the following details on a corporate bond: ». Issuer Citicorp ». Face Value $100 » Coupon 8% ». Maturity I 0 years • Suppose the market price of the bond is $107.02. Find the current yield and YTM of the bond. 8 CY=--=748% 107.02 . Using a Financial Calculator to Find YTM I PV=S107.0:> PMT=S8> r--r-:__ ---,I~ D=10 :/ FV=SI00> Bond Ratings Q•• 11Iy S&P Moody'. Prime AAA Au HlP AA Aa U_r A A Mali ... Medilllll BBB Baa JUDk BB, B,CCc. Ba,B, CC.C Cu,Ca,C InDefa_b D D Lj Using Equations to Find YTM • You need to solve for r such that: S8[ 1] 5100 -I-n +n=5107.02 , 1+, 1+, • Trial and error gives us: r=6%: ~[I-_I_]+~=5114.72 0.06 1.06 10 1.06 10 r=8%: ~[l-_I_]+ 5100=5100.00 0.08 1.08 10 1.08 10 58 [ I] 5100 r=7%: - 1-- 10 +-10 =5107.02 0.07 1.07 1.07 Bond Risk • The coupon payment and face value of a bond are fixed. • ~ver, bonds are not riskfree. .011: risk is risk from the possibility that the issuer wil not be able to pay coupon interest and face value as promised. • lYJ6.e.rtst rtl is<.. risk is risk from interest rate changes during a bond's term.
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