An 8% semiannual coupon bond matures in 5 years. The bond has a face value of $1,000 and a current yield of 8.21%. What are the bond’s price and YTM?
calculate using a financial calculator
The problem is to solve for the YTM and Price, given the following facts:
N = 5 ´ 2 = 10, PMT = 80/2 = 40, and FV = 1000. In order to solve for I/YR we need PV.
However, the current yield is equal to 8.21%. Given this information, find PV (Price).
Current yield = Annual interest/Current price
0.0821 = $80/PV
PV = $80/0.0821 = $974.42.
Now, solve for the YTM with a financial calculator:
N = 10, PV = -974.42, PMT = 40, and FV = 1000. Solve for I/YR = YTM = 4.32%. However, this is a periodic rate so the nominal YTM = 4.32%(2) = 8.64%.
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