Bond Yields [LO2] Seether Co. wants to issue new 20-year bonds for some muchneeded expansion projects.

The company
currently has 8 percent coupon bonds on the market that sell for $930, make semiannual payments, and mature in 20 years
What coupon rate should the company set on its new bonds if it wants them to sell at par?

nT
C
C 8% P  y
s


s 1 
Market price 930 1   1
M 1000  n 
T 20  
n 2  
C  1 
YTM 8.75%  1
y  y  
nT

   1  
Settlement date n  n 
maturity date n2
Price
 
 
C  1 
 1
y  y
2T

   1   
2  2 
ansion projects. The company
ments, and mature in 20 years.
to sell at par?

T
C M
 y
s

y
nT
1 
1   1  
 n  n
 
 
C  1  M
1
y  y 
nT
 y
nT

  1     1  
n  n   n

 
 
C  1  M
1
y  y
2T
  y
2T

  1     1  
2  2   2
C% 10%
T 20
M 1000
P market 1197.93 nT
C
P 
YTM 8% 
s 1 y
s

1   1
 n  
Settlement

Maturity 
C  1
 1
P (valuation) y  y
nT

   1  
n  n
n2

Goal seek 

C  1
 1
y  y
2T

   1  
2  2
 nT
C M
 s
 nT

s 1 y  y
1   1  
 n   n 
 
 
C  1  M
 1
y  y  
nT
y
nT

   1     1  
n  n   n
2
 
 
C  1  M
 1
y  y
2T
  y
2T

   1     1  
2  2   2
•Suppose the Xanth (pronounced “zanth”) Co. were to issue a bond with 10 years to maturity. The Xanth bond has
an annual coupon of $80. Similar bonds have a yield to maturity of 8 percent. Based on our preceding discussion,
the Xanth bond will pay $80 per year for the next 10 years in coupon interest. In 10 years, Xanth will pay $1,000
to the owner of the bond. What would this bond sell for?

coupon 80
Face value (redeemption) 1000
rate 8.0%
YTM (yield) 7%
Settlement
Maturity
PV compare to face value
 Consider a bond with a 10% annual coupon rate, 15 years to maturity and a par value of
$1,000. The current price is $928.09.
n=1 n=2
rate 10% Pv 928.09 928.09
settlement 1/1/2000 fv 1000 1000
maturity 1/1/2015 pmt 100 50
Face value 1000 nper 15 30
PV 928.09 rate
n=1,Yield to maturity=

n=2, YTM=
 Bond X is a premium bond making semiannual payments. The
bond pays a coupon rate of 7.4 percent, has a YTM of 6.8
percent, and has 13 years to maturity. Bond Y is a discount
bond making semiannual payments. This bond pays a coupon
rate of 6.8 percent, has a YTM of 7.4 percent, and also has 13
years to maturity. What is the price of each bond today? If
interest rates remain unchanged, what do you expect the price
of these bonds to be one year from now? In three years? In
eight years?In 12 years? In 13 years? What’s going on here?
Illustrate your answers by graphing bond prices versus time to
maturity.

Bond X Bond Y
Rate 7.40% 6.80%
YTM 6.80% 7.40%
n 2 2 Now
Face value 100 100 1 year later
T 13 13 3 yrs later
settlement 1/1/2000 1/1/2000 8 yrs later
maturity 1/1/2013 1/1/2013 12 yrs later
Price 13 yrs later

B
12.00

10.00

8.00

6.00

4.00

2.00

0.00
1 year later 3
 Use Price function Use PV function
settlement Bond X Bond Y T Bond X Bond Y
1/1/2000 13
1/1/2001 12
1/1/2003 10
1/1/2008 5
1/1/2012 1
1/1/2013 0

Bond price vs Time to maturity

12.00

10.00

8.00

6.00

4.00

2.00

0.00
1 year later 3 yrs later 8 yrs later 12 yrs later 13 yrs later

Bond X Bond Y
 J Corporation has two different bonds currently
outstanding. Bond M has a face value of $20,000 and
matures in 20 years. The bond makes no payments
for the first six years, then pays $900 every six
months over the subsequent eight years, and finally
pays $1,300 every six months over the last six years.
Bond N also has a face value of $20,000 and a
maturity of 20 years; it makes no coupon payments
over the life of the bond. If the required return on both
these bonds is 5.4 percent compounded
semiannually, what is the current price of Bond M? Of
Bond N