Detailed Answer
(A)
FV = 1000
CR = 10%
R (YTM) =?
T = 6 years
Coupon = FV × CR = 100
Bond’s price = 900
Since FV > Bond’s Value, Coupon rate < YTM (based on above
three observations)
So, we have to use trial and error method. We have to start
with a value > 10 and find the price until we
get a value < 900.
Bond Price = (1/(1+R)^t)((coupon*((1+R)^t-1)/R)+Face Value)
So,
If YTM = 11%, price =957.69 (> 900, so keep guessing)
If YTM = 12%, price = 917.78 (> 900, so keep guessing)
If YTM = 13%, price = 880.06 (< 900, so stop)
So, YTM must lie between 12 and 13.
So, using interpolation technique,
YTM
= 12 + (917.78 – 900) ÷ (917.78 – 880.06)
= 12 + 17.78 ÷ 37.72
= 12.47%