Question

2. Scandinavian Design Inc.'s bonds currently sell for $645 and offer a coupon rate of 4% paid semi-annually. If the remaining time to maturity on the bonds is 22 years, what is their yield to maturity? (4 points) Show me what portion of the price is being generated by the expected coupon payments for bonus points.

Answer 1

The YTM is computed as shown below:

Plug the below variables in the financial calculator as follows:

PV = - 645

FV = 1,000

PMT = 20 (4% / 2 x 1,000)

N = 44 (22 x 2)

Finally press CPT and then press I/Y. It will give I/Y equal to 3.62679513%

Since the interest is paid on semi annual basis, hence the above rate shall be multiplied by 2 as follows:

= 3.62679513% x 2

= 7.25% Approximately

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