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Consider the following bonds: Bond A: 10% coupon, paid annually, matures in 3 years Bond B: 8%...

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Finance

Consider the following bonds:

Bond A: 10% coupon, paid annually, matures in 3 years

Bond B: 8% coupon, paid annually, matures in 2 years

If Bond A is selling for $1,060 and Bond B is selling for $940,what is the yield to maturity on a portfolio consisting 30% of BondA and 70% of Bond B?

A. 8.60%

B. 9.00%

C. 9.61%

D. 10.38%

Answer & Explanation Solved by verified expert
4.4 Ratings (774 Votes)

Bond A

                  K = N
Bond Price =? [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =3
1060 =? [(10*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^3
                   k=1
YTM% = 7.69

Bond B

                  K = N
Bond Price =? [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =2
940 =? [(8*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^2
                   k=1
YTM% = 11.53
Weight of Bond A = 0.3
Weight of Bond B = 0.7
YTM of Portfolio = Weight of Bond A*YTM of Bond A+Weight of Bond B*YTM of Bond B
YTM of Portfolio = 7.69*0.3+11.53*0.7
YTM of Portfolio = 10.38

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Transcribed Image Text

Consider the following bonds:Bond A: 10% coupon, paid annually, matures in 3 yearsBond B: 8% coupon, paid annually, matures in 2 yearsIf Bond A is selling for $1,060 and Bond B is selling for $940,what is the yield to maturity on a portfolio consisting 30% of BondA and 70% of Bond B?A. 8.60%B. 9.00%C. 9.61%D. 10.38%

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