Question

The Salem Company has a bond outstanding that currently sells for $955, has a 10 % coupon rate and a $1000 par value, pays interest annually, and has 12 years to maturity. What is the yield to maturity on this bond?

Answer 1

Yield To Maturity (YTM) = { C + ( ( F - P ) / n) } / { (F+P) / 2 }

Where,

C = Coupon payment = Face value × Coupon rate

= $ 1,000 × 10% = $ 100

F = Face value = $ 1,000

P = Current Market price = $ 955

n = Years to maturity = 12 years

Yield To Maturity = { 100 + ( ( $ 1,000 - $ 955) / 12) } / { ( $ 1,000 + $ 955) / 2 }

= 103.75 / 977.5

= 0.1061

YTM is expressed in percentage.

Yield to maturity ( in % ) = 0.1061 × 100

= 10.61%

The yield to maturity on this bond is 10.61%.