Question

Rudy Sandberg wants to invest in four-year bonds that are currently priced at $800. These bonds have a coupon rate of 3.90 percent and make semiannual coupon payments. What is the current market yield on this bond?

Answer 1

Bond price =C*[1-(1+YTM)^-n / YTM] + [P/(1+YTM)^n]
Where,
C= Coupon amount $1000*3.9% *6/12 =19.5
YTM = Yield To maturity
n = Number of periods =4*2 =8
P= Par value
$800=19.5 * [1 - (1 + YTM)^-8 / YTM] + [1000 / (1 + YTM) ^8]
800/19.5 =[1 - (1 + YTM)^-8 / YTM] + [1000 / (1 + YTM) ^8]
41.0256 =[1 - (1 + YTM)^-8 / YTM] + [1000 / (1 + YTM) ^8]
YTM (semiannual) =5.0508%
YTM (Annually) =5.0508%*12/6 =	10.10%
Correct Answer =10.10%