Question

A semiannual coupon-paying treasury has a maturity of 15 years, a current yield of 8%, and the price of 90. What is its yield to maturity?

Hint: Current Yield calculation uses the Annual Coupon amount.

A. 4.19%.

B. 4.62%.

C. 8.38%.

D. 8.40%.

Answer 1

Answer : Correct Option is (C.) 8.38%

Calculations :

Current Yield = Coupon / Price

8% = Coupon / 90

==> Coupon = 90 * 8% = 7.2

Given  Current Yield calculation uses the Annual Coupon amount therefore Annual Coupon is 7.2

Calculation of Yield to Maturity:

Using Financial Calculator

=RATE(nper,pmt,pv,fv)

where nper is Number of years to maturity i.e 15 * 2 = 30 (Multiplied by 2 As coupons are paid semiannually)

pmt is Interest payment i.e 7.2 / 2 = 3.6 (Divided by 2 As coupons are paid semiannually)

pv is Current Market Price

= 90

Note : pv should be taken as negative.

fv is face value i.e 100

=RATE(30,3.6,-90,100)

therefore ,Yield to Maturity is 4.19%(Semiannual)

Yield to Maturity is 8.38% [4.19% * 2] (Annual)

answered by: anonymous