Bond  Maturity  Coupon  Price

  A       2      8%    106.0905

  B       2       6%     102.3825

Assume a two-year bond with face value 1000 and coupon rate 5%. Investors expect a 0.4% premium for one year interest and 0.1% for two year interest. The bonds are stripped to two parts: IO (interest only) and PO (principal only). PO pays the cash flow from the return of the principal (face value). What is the yield to maturity of the created PO security?

 

Answer rating: 100% (QA)

To find the yield to maturity YTM of the created Principal Only PO security we first need to calcula... View the full answer