Question

A 15-year bond is currently priced at $900 and pays a semi-annual coupon payment of 8%. The par value is $1,000. What is the yield to maturity?

Answer 1

Current price= 900 , Coupon payment =8%, Semi annualy payment = 1000x0.04 = 40, periods = 15x2=30

Price of bond= Coupon payment x Cumulative discount factor @ R for 15 years + Maturity value x discounitng factor for 15th year

We are going with Trial and error method:

1. Calculate price at 5%

= 40 x 15.372245 + 1000 x 0.231377

= 846.2668

2. If we calculate at 4% i.e. coupon rate it will come 1000.

So do interpolation to calculate in between value

= 4.623 %

so YTM is 4.623% x 2 = 9.24% approx componded semi annualy