Question

What is the Yield to Maturity (YTM) on a bond that has a market value of $905, a face value of $1,000, an 8% coupon rate, and a 9-year remaining maturity?

Answer 1

Coupon rate = 8% face value = 1000

N is 9 years price of bond is 905

We have to find yeild to maturity on the bond to calculate cost of debt

Value of bond at 8% yeild is 1000(as when yeild equals coupon rate price equals face value)

Now value of bond at 9% yeild

Value of bond is present value of all cash flows

= 80(PVIFA 9% 9Y) + 1000(PVIF 9% 9Y)

= 80(5.9952) + 1000(0.46)

= 939.52

Nowwe use interpolation method to calculate yeild

9% + (1000-905)/(1000-939.52) = 10.57

Yeild to maturity is 10.57%