Question

Use the approximation formula to calculate the yield to maturity for a ten-year bond that has a coupon payment of $20, a face value of $1,000 and a price of $1,040.

Answer 1

Coupon payment = Cp = 20

Face value = F = 1,000

Price = V = 1,040

Number of year = N = 10

Yield to maturity = YTM = ?

By the approximation formula:

YTM = [Cp + {(F – V) / N}] / [(F + V) / 2]

          = [20 + {(1,000 – 1,040) / 10}] / [(1,000 + 1,040) / 2]

          = [20 – 4] / [2,040 / 2]

          = 16 / 1,020

          = 0.01568

          = 1.57% rounded percentage

Answer: YTM is 1.57%.