Question

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.

Answer 1

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%