Stellar Corp. recently issued $100 par value deferred coupon bonds, which will make no coupon payments in the next four years. Regular annual coupon payments at a rate of 8% will then be made until the bonds mature at the end of 10 years. If the bonds are currently priced at $87.00, their yield to maturity is closest to:
A.6.0%.
B.8.0%.
C.10.1%.
CFA Practice bank, A right. How do I put this in on calculator? I get error 5 if 108 is put in positive and if I put it in negative I get 35%
The coupons are 8% annually for years 5 to 10.
If the yield was 8%, it would be trading at par at the end of year 4.
You should be able to guess the right answer using that information, given that one answer is 8%, one is less than 8%, and one is greater than 8%
If the price were 73.50 or 61.80, then the YTM would be 8.0 or 10.1, respectively. I would be wary of using the YTM to coupon comparison in the case where there is a deferral period.
I was thinking if the yield were 8%, it would be trading at par at the end of 4 years, so present value would be 100/1.08^4=73.50
The actual price is 87.00>73.50 so the yield is less than 8%
Hi, thank you first of all. But I typed in this way:
CF
cfo 0 c01 0 F01 1 C02 0 F02 1 C03 0 F03 1 C04 0 F04 1 C05 8 F05 1 C06 8 F06 1 C07 8 F07 1 C08 8 F08 1 C09 8 F09 1 C10 108 F10 1
Then I got 35% irr but why is my way wrong and yours right? I’ve read the manual and I think my way makes more sense because I don’t see where you get f01 4 and f02 5 from?
If I use your exact sequence, but enter CF0 as -87, I get an IRR of 5.9999. With CF0 as 0, I get Error 5.
The CF worksheet lets you enter a series of identical CFs: C01 0 F01 4 means fill in the next 4 slots with the amount of 0; C02 8 F02 5 means fill the next 5 slots with 8. Your way produces the exact same arrangement of CFs, but you’re gonna give yourself keypuncher’s cramp by entering each individual CF in its own slot!