Exercises

One
A bond was issued at Rs 100, 10% coupon annual, 7 years ago. Total tenor was 11 years
Its price is Rs 102. What is the YTM

Two
A bond was issued a year ago for Rs 100, 11% coupon semi annual, its tenor was 12 years
and its price today is Rs 105. What is its YTM
Three for practice
You invest in the bond in exercise two above. Post maturity you invest in another bond where
the coupon is 10% for 10 years. All interim coupons that you earn are invested at 6%.
The final corpus after the second bond matures is then invested at 9% in a Govt fund
You will withdraw Rs xx from this fund every year for the next 15 years (to meet your
living expenses). How much is this Rs xx that you can withdraw
Rate
2nd qsn solution

Cash flow PV Factor DCF

5.5 0.951176
5.5 0.904737
5.5 0.860564
5.5 0.818548
5.5 0.778584
5.5 0.740571
5.5 0.704413
5.5 0.670021
5.5 0.637309
5.5 0.606193
5.5 0.576596
5.5 0.548445
5.5 0.521668
5.5 0.496198
5.5 0.471972
5.5 0.448929
5.5 0.42701
5.5 0.406162
5.5 0.386332
5.5 0.36747
5.5 0.349529
5.5 0.332463
5.5 0.316231
105.5 0.300792

5.2314703731
4.9760513209
4.7331027383
4.5020157724
4.2822112968
4.0731384602
3.8742733055
3.6851174573
3.5051968726
3.3340606529
3.1712799141
3.0164467119
2.8691730192
2.7290897537
2.5958458531
2.4691073952
2.3485567611
2.2338918392
2.1248252679
2.0210837158
1.9224071965
1.828548417
1.7392721581
31.7335307706
105.00

Rate

105

or was 11 years

as 12 years

er bond where

5.13%
2

105.13% 3rd Solution

110.53%

10.53% annual

These coupons are

re invested at 6% per
annum.

Rate
Coupons half years
5.5
23
5.5
22
5.5
21
5.5
20
5.5
19
5.5
18
5.5
17
5.5
16
5.5
15
5.5
14
5.5
13
5.5
12
5.5
11
5.5
10
5.5
9
5.5
8
5.5
7
5.5
6
5.5
5
5.5
4
5.5
3
5.5
5.5

2
1

6%
10.85473
10.53857
10.23162
9.933612
9.644283
9.363382
9.090662
8.825885
8.568821
8.319243
8.076935
7.841685
7.613286
7.39154
7.176253
6.967235
6.764306
6.567288
6.376007
6.190298
6.009999
5.83495
5.665
183.8456

3%

Total Corpus

Total Corpus
it is reinvested
at 9% govt fund

Total Return in coupouns invested at 6% +

last coupon+ final bond of 100 ruppes (100+5.5)
Rate
9%
289.3456 26.041102757 315.3867 35.89589 279.4908
279.4908 25.154171894 304.645 35.89589 268.7491
268.7491 24.187417253 292.9365 35.89589 257.0406
257.0406 23.133654695 280.1743 35.89589 244.2784
244.2784 21.985053507 266.2634 35.89589 230.3675
230.3675 20.733078211 251.1006 35.89589 215.2047
215.2047 19.368425139 234.5731 35.89589 198.6773
198.6773 17.880953291 216.5582 35.89589 180.6623
180.6623 16.259608976 196.9219 35.89589 161.026
161.026 14.492343673 175.5184 35.89589 139.6225
139.6225 12.566024493 152.1885 35.89589 116.2926
116.2926 10.466336586 126.759 35.89589 90.86308
90.86308 8.1776767677 99.04075 35.89589 63.14486
63.14486 5.6830375658 68.8279 35.89589 32.93201
32.93201 2.9638808357 35.89589 35.89589 9.59E-013
This value is set to zero using goal seek.

Hence he can withdraw

35.8959 every year.