Missmallprincess --
Long calculations like this cry out for a spreadsheet. But if you're
using Microsoft Excel, as I've done in the calculations here, you'll
want to make sure that you have the Analysis Toolpak loaded. It
contains the YIELD function that you'll need:
http://www.mooneyevents.com/YTM.xls
The format for this Excel calculation is:
YIELD(settlement,maturity,rate,pr,redemption,frequency)
Where:
Settlement: is the security's settlement date. The security
settlement date is the date after the issue date when the security is
traded to the buyer.
Maturity: the date when the security expires. I've set these up for
20 years apart (2000 to 2020).
Rate: is the security's annual coupon rate; here it's zero because
it's a zero-coupon bond (they sent me to grad school for that!)
Pr: is the security's price per $100 face value. It means dividing
everything by 100, but that's how they do bonds.
Redemption: redemption value per $100 face value. Again, divide by 100.
Frequency: is the number of coupon payments per year. This doesn't
matter, since there's no coupon (but I put in a 1).
----
It's important to check the result here. If the interest rate is 8.5%
then 1.085^20 should give us the factor by which we multiply
$195,616.39 to get to our $1 million. Shucks, it's off by a penny!
Best regards,
Omnivorous-GA |
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