Question

A fifteen-year bond with a 10% coupon is selling for $856.78. Calculate the YTM on the bond. 8.53% 8.15% 4.27% 7.04%

Answer 1

The yield to maturity on the bond can be calculated with the use of Rate function/formula of EXCEL/Financial Calculator. The function/formula for Rate is Rate(Nper,PMT,-PV,FV) where Nper = Period, PMT = Payment (here, Coupon Payment), PV = Present Value (here, Current Bond Price) and FV = Future Value (here, Face Value of Bonds)

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Solution:

Here, Nper = 15, PMT = 1,000*10% = $100, PV = $856.78 and FV = $1,000

Using these values in the above function/formula for Rate, we get,

Yield to Maturity = Rate(15,100,-856.78,1000) = 12.12% (answer)

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Note:

The answer options provided in the question are not correct. These options would relate to a situation where the current bond price is more than the face value of bond. Please check the answer options again.