Question

(Bond valuation) ExxonMobil 20-year bonds pay 6 percent interest annually on a $1,000 par value. If bonds sell at $945, what is the bonds’ expected rate of return? Please answer it without a financial calculator or Excel.

Possibly with this formula: PV= PMT x ((1-(1+r)^-n)/(r)) + Face Value x (1/(1+r)^n)

Answer 1

Interest = 1000 *.06 = 60

Yield to maturity = [Interest +(face value - price )/ years to maturity )/[(face value + price)/2]

        = [60+ (1000 -945)/ 20 ]/[(1000+945)/2]

       =[60+ (55/20)]/[1945/2]

        =[60+ 2.75]/972.5

       = 62.75 /972.5

          = .0645 or 6.45%    [rouned to 6.50% ]