Question

A four-year bond has an 8% coupon rate and current value of the bond is $875.80, calculate the yield to maturity of the bond.

12.25%

5.96%

11.91%

12.00%

Answer 1

Face value of bond is not given , let us assume face value of bond be $1000.
The formula to calculate yield to maturity is as under,
Approx.Yield to maturity of bond = [C + (F-P)/n] / [(F+P)/2]
C = Coupon payment = $1000 * 8% = $80
F = Face value of bond = $1000
P = Price of bond = $875.80
n = no.of years to maturity = 4
Approx.Yield to maturity of bond = [80 + (1000-875.80)/4] / [(1000+875.80)/2]
Approx.Yield to maturity of bond = [80 + 31.05] / 937.90
Approx.Yield to maturity of bond = 0.1184 i.e.11.84%
As the above formula gives the approx.yield to maturity, the nearest option is 11.91%
Yield to maturity = 11.91%