Question

# Barry Cuda is considering the purchase of the following Builtrite bond: \$1000 par, 4 3/4% coupon...

Barry Cuda is considering the purchase of the following Builtrite bond: \$1000 par, 4 3/4% coupon rate, 15 year maturity that is currently selling for \$970. If Barry purchases this bond, what would his approximate yield to maturity be?

4.26%

4.54%

5.05%

5.32%

Option (c) is correct

The formula for calculating the yield to maturity is:

Yield to maturity = (Coupon payment + (Face value - Price / No. of years to maturity) / Face value + Price / 2)

Coupon payment = Coupon rate * face value

Coupon payment = 4* 3/4% * \$1000 = 4.75% * \$1000

Coupon payment = \$47.5

We have, Coupon payment = \$47.5, Face value = \$1000, price = \$970 and no. of years to maturity = 15

Now, putting these vales in the above formula, we get,

YTM = (\$47.5 + (\$1000 - \$970 / 15) / \$1000 + \$970 / 2)

YTM = (\$47.5 + 2) / 985

YTM = \$49.5 / 985

YTM = 0.0502 or 5.02% approximately

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