Question

11-What is the approximate yield to maturity for the following bonds? Assume these are bonds issued in the United States.

a.5 years to maturity, 6 percent coupon rate, current price is $950.

b.10 years to maturity, 0 percent coupon rate, current price is $339.

c.15 years to maturity, 8.5 percent coupon rate, current price is $1030.

Answer 1

Assumption: It has been assumed that Face Value of bonds in all the above bonds is equal to $ 1000

a. Yield to Maturity

= [ ( Coupon Amount + (Redemption Value - Face Value)/ years to maturity) / (( Redemption Value + Face Value)/2) ]

= [ ( 60 + (950 - 1000)/ 5) / (( 950 + 1000)/2) ]

= 0.0513 or 5.13%

b. Let the yiled to maturity be x

=> 339(1+x)¹⁰ = 1000

=> x = (1000/339)^1/10 - 1

x = 1.11424 - 1

x = 0.11424 or 11.424%

c.

Yield to Maturity

= [ ( Coupon Amount + (Redemption Value - Face Value)/ years to maturity) / (( Redemption Value + Face Value)/2) ]

[ ( 85 + (1030 - 1000)/ 5) / (( 1030 + 1000)/2) ]

= 0.0897 or 8.97%