Question

A bond is selling for $852. The bond has 27 years to maturity and a coupon rate of 6%. What is the yield to maturity of this bond? The bond makes semiannual payments.

Answer 1

Current Price = 852

Coupon 6% / 2= 0.03

Maturity = 27 years * 2 = 54

SInce the Current Price of Bond > Par Value, the TYM will be less than Coupon.

Let's assume the YTM be 7%

Value of Bond =

=

= 879.43

Now,

Let's assume the YTM be 8%

Value of Bond =

=

= 780.07

YTM = $Lower Rate + (\frac{Surplus}{Surplus + deficit}) * (Higher Rate - Lower rate)$

= 7% + ((879.43 - 852) / (879.43 - 852) + (852- 780.07)) * (8-7)

=7% + 0.26%

= 7.26%