Question

What is the yield to maturity on the following bonds; all have a maturity of 5 years, a face value of 2000, and a coupon rate of 4 percent (paid semiannually). The bond's current prices are: a. $1,980 b. $ 2,100

Answer 1

Face value of bond = 2000 $

Time = 5 Years

Coupon rate = 4 % (semi annually)

Therefore effective annual rate = (1 + 4%/2)^1*2 - 1 = 4.04 %

A. Current price = 1980 $

Yield to Maturity = [C+ (F-P) / n] / [(F+P) / 2]   

Where,

• C = Coupon Payment
• F = Face Value
• P = Price
• n = Years to maturity

= [80.8 + (2000 - 1980) / 5] / [(2000+ 1980) / 2]

= 84.8 / 1990

= 4.26 %

B. Current price = 2100 $

Yield to Maturity = [C+ (F-P) / n] / [(F+P) / 2]   

= [80.8 + (2000 - 2100) / 5] / [(2000+ 2100) / 2]

= 60.8 / 2050

= 2.96 %