Question

# Yield to Maturity and Current Yield You just purchased a bond that matures in 5 years....

Yield to Maturity and Current Yield

You just purchased a bond that matures in 5 years. The bond has a face value of \$1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond's yield to maturity? Round your answer to two decimal places.

Current Yield = Annual Coupon Payment / Current Market Price

8.21 % = ( \$ 1,000 * 8%) / Current Market Price

Current Market Price = \$ 80 / 8.21%

= \$ 974.4214373

= \$ 974

The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

= [\$ 80+ ( \$ 1,000- \$ 974.4214373) /5] /[( \$ 1,000+ \$ 974.4214373)/2] *100

= 85.11571254/987.2107187*100

= 8.621838371%

Note : Coupon = Rate * Face Value

= 8% * \$ 1,000

= \$ 80

Since this formula gives an approximate value, the financial calculators can be used alternatively.

where,

Par Value = \$ 1,000

Market Price = \$  974.4214373

Annual rate = 8% and

Maturity in Years = 5 Years

Hence the yield to maturity = 8.66%

Hence the correct answer is 8.66%

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