Question

XZYY, Inc. currently has an issue of bonds outstanding that will mature in 23 years. The bonds have a face value of $1,000 and a stated annual coupon rate of 10% with semi-annual coupon payments. The bond is currently selling for $1151. The bonds may be called in 5 years for 112% of par value. What is the quoted annual yield-to-maturity for these bonds?

8.89%

4.25%

8.50%

8.24%

7.81%

Answer 1

Yield-to-Maturity (YTM) of the Bond

Par Value = $1,000

Semiannual Coupon Amount = $50 [$1,000 x 10% x ½]

Bond Price = $1,151

Maturity Years = 46 Years [23 Years x 2]

Therefore, Yield to Maturity [YTM] = Coupon Amount + [(Par Value – Bond Price) / Maturity Years] / [(Par Value + Bond Price)/2]

= [$50 + {($1,000 – $1,151) / 46 Years)] / [($1,000 + $1,151) / 2}] x 100

= [($50 - $3.28) / $1,075.50] x 100

= 4.25%

Semiannual Yield to Maturity = 4.25%

The Annual Yield to Maturity of the Bond = 8.50% [4.25% x 2]

“Hence, the quoted annual Yield-to-Maturity of the Bond = 8.50%