Question

A bond pays 11% coupon semiannually, has a par value of $1,000 and will mature in...

A bond pays 11% coupon semiannually, has a par value of $1,000 and will mature in 10 years. If it currently sells for $942.65, what is its yield to maturity?

7.5%

11.6%

12%

8%

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Homework Answers

Answer #1

Option (c) is correct

The formula for yield to maturity is:

Yield to maturity = C + F - P /n / F + P / 2

where, C is the coupon payment, F is the face or par value of the bond = $1000, P is the current price of the bond = $942.65 and n is the no. of years to maturity = 10.

Coupon payments = $1000 * 11% = $110

Putting the values in the above formula, we get,

Yield to maturity = $110 + ($1000 - $942.65) / 10 / ($1000 + $942.65) / 2

Yield to maturity = $110 + ($57.35 / 10) / ($1942.65 /2)

Yield to maturity = $110 + 5.735 / $971.325

Yield to maturity = $115.735 / $971.325

Yield to maturity = 0.1191 or 12%

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