# 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%

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

If you need any clarification, you can ask incomments.

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