Question

Mary Smith is looking to invest in a three-year bond that makes semi-annual coupon payments at a rate of 5.225 percent. If these bonds have a market price of $970.00, what yield to maturity can she expect to earn? (Round intermediate calculations to 5 decimal places, e.g. 1.25145 and final answer to 2 decimal places, e.g. 15.25%.)

Answer 1

Suppose the face value be $1000
Coupon rate is 5.225%
Semi-annual coupon payments= (Annual Coupon rate)*(Face value)/2
=($1000*5.225%/2)=26.125
Present value of the bond is $970.00
Time period is 3 years, as the coupon payments are made semiannually, the number of periods will be 3*2=6
With these values, we can determine the yield to maturity using excel as:

As the present value is a cash outflow, it is taken as negative in excel.

So, the semiannual yield to maturity is 3.17%
Annual yield to maturity=2*3.17%=0.0634 or 6.34%

Answer: 6.34%