Calculating bond YTM

[archived_user]

Hi!
I am calculating the YTM of a 2-year bond with the following structure:
(1) It paid fixed coupon of 10% for the first year. Coupon paid semi-annually.
(2) It paid float rate + 4% spread for the next year. Coupon paid semi-annually.
Please help me calculating the YTM. I have no remaining knowledge on bond valuation and such.

 

[archived_user]

Recall that YTM is simply an IRR.
Whip out your calculator and put in the cash flows:

• C0 = initial price of the bond; make sure that it’s negative
• C1 = 50 (assuming a 1,000 par)
• C2 = 50 (assuming a 1,000 par)
• C3 = whatever (based on rrf + 400 bp)
• C4 = 1,000 + whatever (based on rrf + 400 bp and assuming a 1,000 par)

Hit the IRR button to get the semiannual YTM. Double it to get the annual YTM (BEY).
Voilà!

 

[archived_user]

Thanks for this. But isn’t the whatever (float) rate unknown at the present? How can I calculate such IRR?

 

[archived_user]

There are two methods for that.
Method 1 (Simplistic approach):
Assume the floating rate is flat (e.g. 6 month floating rate held constant for the entire duration of the bond)
Method 2 (More appropriate):
Use the current yield curve relevant to the bond and calculate the implied 6-month forward rates. Use the forward rates as the floating rates for future coupon payments.

 

[archived_user]

cristianomario wrote: Thanks for this. But isn’t the whatever (float) rate unknown at the present? How can I calculate such IRR?

You had written the question as if the bond had already matured.
For a bond maturing in the future, use the yield curve: the first payment will be based on the 6-month spot rate, the second on the 6-month forward rate starting 6 months from today, the third on the 6-month forward rate starting 12 months from today, and the fourth on the 6-month forward rate starting 18 months from today.