Question

Currently, a 5 year bond with an annual coupon rate of 7% is selling at $975.00. If it pays interest semi-annually what is the yield to maturity?

Select one:

a. 7%

b. 7.6105%

c. 1.9026%

d. 3.8052%

Answer 1

Answer : Correct option is (b.) 7.6105%

Explanation :

Using Financial Calculator

=RATE(nper,pmt,pv,fv)

where nper is Number of years i.e 5 * 2 = 10 (As semi annual Coupon Payment)

pmt is Interest payment i.e 1000 * 7% =70/2 = 35 (Divided by 2 As semi annual Coupon Payment)

pv is Current Market Price

= - 975

Note : pv should be taken as negative.

fv is face value i.e 1000

=RATE(10,35,-975,1000)

therefore ,Yield to maturity is 3.80525%(Semi annual)

Yield to maturity is 7.6105% [3.80525% * 2] (Annual)