Question

What is the yield to maturity on a 3 year coupon bond with a face value of $1,000 that makes coupon payments of $100 if the bond is priced at face value?

a 9% b 11% c 12% d 10%

Answer 1

Yield to maturity (YTM) is a method which is used to calculated actual yield on the bond adjusted with time value. This is calculated by following the steps given below:

1) Add the annual payments received in form of coupon-payments and Annual difference in face value and price of the bond.

where C is coupon payment which is $100

F is face value which is $1000

P is price which is $1000

n is number of years which is 3

Now, put the values in the formula:-

Step 2) Average the value of face value and price:-

  

Step 3) Calculate the percentage of value of step1 with the base of value of step 2:-

Thus, YTM will be 10% and answer is d 10%