Question

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%

Answer 1

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