Question

A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000 and selling for $916. What is the yield to maturity of this bond?

Answer 1

The YTM (Yield to Maturity) can be calculated by the following formula:

The Yield to maturity of the bond = [ C + (F-P) / n ] / { (F+P) / 2 }

Where, C = Coupon or Interest payment = 5 % * Face value= 5% * $1000 = $ 50

F= Face value of the bond

P = Market price or current price of the bond

n = Years to marturity

So, YTM = [ 50 + (1000 - 916) / 12 ] / [ (1000 + 916) / 2]

or, YTM = [50 + 7] / 958 = 57 / 958 = 0.0595 ~ 5.95 %

Hence, the Yield to maturity of this bond is 5.95 %.

Hope this resolves your query.