Question is about ecnomics/finance programming in Python

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timer Asked: Jan 21st, 2021

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The yield to maturity, often shortened to simply yield, is the average rate of return, including the loss (or gain) of capital because the bond was purchased above (or below) par. For a bond, this is the r that makes the bond pricing formula equal to the current price. It is easy to find it numerically. One algorithm consists of the following steps: start with an initial guess, and compute the bond price p̂ from that guess. If p̂ is greater than the actual price, the guess is too low. If p̂ is lower than the actual price, the guess is too high. Each pass, we improve our guess by adding or subtracting a certain value (the step size). A good starting value for the step size is 0.02. The key for convergence is to decrease the step size every time we cross over (i.e., if the previous guess was to high, and the new guess is too low, reduce the step size before making the new guess.) Decreasing the step size by half works well. You stop when p̂ is close enough to the price (error is smaller than tolerance). Note that this is different than the example in the tutorial. Do not use a grid for this question. Write a function ytm(price, T, par=1000, c=0.0, n=2, initial ytm=0.1, tolerance=0.001) for computing the yield to maturity of a bond using the algorithm described above. The function takes the following parameters: a) price: the price of the bond. b) T: the maturity of the bond (in years). c) par: the face value of the bond (optional, default value=1000). d) c: the coupon rate of the bond (optional, default value=0.0). e) n: the number of coupon payments per year of the bond (optional, default value=0.2). f) initial ytm: the initial guess (optional, default value=0.1). g) tolerance: the stopping criteria (optional, default value=0.001). The function should call the provided price bond() function. The function should return a float with the yield to maturity of the bond. Note: for the provided tests, the code should execute instantaneously. If it takes time, you are doing something wrong. Example > >> print ( f ’{ ytm ( price = 1019 .32 , T =1 , par = 1000 , c = 0.08 , n =2 , i ni ti al _ ytm =0.1 , tol erance = 0 .0001 ) :0.5 f } ’) Out : 0 .05981 ...
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