This question illustrates the effects of time to maturity on a bond’s yield to maturity. Tindall Enterprises has two outstanding bonds. Both bonds are risk-fee, both pay 10.00% annual coupons, both have face values of 1000, and both bonds just made a coupon payment; however, bond A matures in 10 years and bond B matures in 5 years. Given that the price of bond A is $ 1,315 and the price of bond B is $ 1,199, how much bigger is the yield-to-maturity of bond A than the yield-to-maturity of bond B? Enter your answer as a perecent without the "%"; round your final answer to two decimals

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andromache andromache · Answer 1 · 2020-03-13T11:17:31+01:00

Answer:

0.41

Explanation:

In this question we have to use the RATE formula that is shown in the excel spreadsheet

Given that,

For the first case

Present value = $1,315

Future value or Face value = $1,000

PMT = 1,000 × 10% = $1,000

NPER = 10 years

The formula is shown below:

= Rate(NPER,PMT,-PV,FV,type)

The present value come in negative

After solving this, the yield to maturity is 5.77%

For the second case

Present value = $1,199

Future value or Face value = $1,000

PMT = 1,000 × 10% = $1,000

NPER = 5 years

The formula is shown below:

= Rate(NPER,PMT,-PV,FV,type)

The present value come in negative

After solving this, the yield to maturity is 5.36%

So the difference is

= 5.77% - 5.36%

= 0.41%