Question

The 8 percent coupon bonds of the Peterson Co. are selling for 98 percent of par value. The bonds mature in 5 years and pay interest semi-annually. These bonds have a yield to maturity of _____ percent.

Answer 1

Solution:

Let par value of bond = $100

Price of bond = $100*98% = $98

Coupon rate = 8%, 4% semi annual

Maturity = 5 Years, 10 Semi annual period

Let yield on bond = r

Now at yield, present value of future cash flows discount at yield will be equal to price of bond.

Let calculate Present value of future cash flows at 4.5%

Present value of cash flows at 9% = $4 * cumulative pv factor at 4.5% for 10 period + $100*PV facotr at 4.5% for 10th period

= $4*7.912718 + $100*0.643928 = $96.04

Present value of cash flows at 4% is $100

Now Yield = 4% + (100 - 98) / (100 - 96.04) * 0.50 = 4.25%

Annual yield = 4.25*2 = 8.50%