Dow Chemical Company has bonds outstanding which are priced at $1,160.10. These bonds carry a coupon rate of 5.85%, make semiannual payments, and mature in 11 years. Assuming the par value is $1,000, what is the annual yield to maturity on these bonds?
| Yield to Maturity formula is as under, | ||||||
| Yield to Maturity = [C + (F-P)/n] / [(F+P)/2] | ||||||
| C = Coupon semi annual payment = [$1000 * 5.85%]/2 = $29.25 | ||||||
| F = Face value of bond =$1000 | ||||||
| P = Price of bond = $1160.10 | ||||||
| n = years to maturity (in semi annual periods) = 11 years * 2 = 22 | ||||||
| Yield to Maturity = [29.25 + (1000-1160.10)/22] / [(1000+1160.10)/2] | ||||||
| Yield to Maturity = [29.25 - 7.27727] / 1080.05 | ||||||
| Yield to Maturity = 21.9727 / 1080.05 | ||||||
| Yield to maturity = 2.03% | ||||||
| Annual yield to maturity = 2.03% * 2 = 4.07% | ||||||
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