Twitchy – a kind of junk bond
Twitchy – a kind of junk bond – carries a 10% coupon rate, has a$1,000 face value and matures in 5 years. What is the change in theimplicit required return (that is, YTM) of Twitchy, if the currentmarket price of Twitchy, which is $950, falls to $850?
a. -4.10%
b. +2.96%
c. +11.34%
d. -14.30%
Answer:
Face Value of bond = $1000
Semi-annual coupon payment = $1000*10%*1/2 = $50
No of coupon payments(n) = No of years to maturity*2 = 5 years*2= 10
– Calculating the Semi-annual YTM when price is $950 using Excel”rate” function:-
Semi-annual YTM = 5.6687%*2
Annual YTM = 11.34%
– Calculating the Semi-annual YTM when price is $850 using Excel”rate” function:-
Semi-annual YTM = 7.1505%*2
Annual YTM = 14.30%
So, Change in YTM when price from $950 falls to $850 = 14.30% -11.34%
= +2.96%
It increased by 2.96%
option B
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