Question

Suppose a​ ten-year, $ 1000 bond with an 8.4 % coupon rate and semiannual coupons is trading for $ 1035.35.

a. What is the​ bond's yield to maturity​ (expressed as an APR with semiannual​ compounding)?

b. If the​ bond's yield to maturity changes to 9.5 % ​APR, what will be the​ bond's price?

Answer 1

Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield but is expressed as an annual rate. In other words, it is the internal rate of return (IRR) of an investment in a bond if the investor holds the bond until maturity, with all payments made as scheduled and reinvested at the same rate.

C= coupon rate

F= face value

P= current price

n= number of years

so, {84+(1000-1.35.35)/10} / (1000+1.35.35)/2 = 7.90

Price of bond

C= coupon rate

P= face value

n= number of years

ytm= yield to maturity

so, 95* {1-(1+.095)-10)/.095)} + 1000/(1+.095)10

=95* 6.27879 + 403.514

=999.99