Question

# XZYY, Inc. currently has an issue of bonds outstanding that will mature in 23 years. The...

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%

#### Homework Answers

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%

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