14.

Required yield to maturity approach: This approach discounts all cash flows at a single interest rate, the YTM. The YTM of a coupon bond is the yield that makes the present value of a bond's promised cash flows equal to the bond's market price, and is also known as the bond's internal rate of return. When pricing a bond using the required YTM approach, investors use information about the YTMs at which comparable bonds are trading to find the discount rate to apply to the bond's cash flows.

h: Calculate the yield to maturity of a coupon bond.

Example: Find the maturity of a two-year coupon bond (4 semiannual periods) with a coupon rate of 6% that is selling for $1,050. Assume semiannual payments with a coupon rate of 6% (coupon payments of $30 every six months).

You can use trial and error to find YTM of 3.393%, or you can use your handy financial calculator:

N = 4, PMT = 30, FV = 1,000, PV = -1,050; CPT I/Y = 1.6965%.

Remember, you must double 1.6965% to get 3.393%.

Required yield to maturity approach: This approach discounts all cash flows at a single interest rate, the YTM. The YTM of a coupon bond is the yield that makes the present value of a bond's promised cash flows equal to the bond's market price, and is also known as the bond's internal rate of return. When pricing a bond using the required YTM approach, investors use information about the YTMs at which comparable bonds are trading to find the discount rate to apply to the bond's cash flows.

h: Calculate the yield to maturity of a coupon bond.

Example: Find the maturity of a two-year coupon bond (4 semiannual periods) with a coupon rate of 6% that is selling for $1,050. Assume semiannual payments with a coupon rate of 6% (coupon payments of $30 every six months).

You can use trial and error to find YTM of 3.393%, or you can use your handy financial calculator:

N = 4, PMT = 30, FV = 1,000, PV = -1,050; CPT I/Y = 1.6965%.

Remember, you must double 1.6965% to get 3.393%.