Question

Douglas Dynamics Inc. has outstanding $1,000 face value 12% coupon bonds that make semiannual payments, and have 8 years remaining to maturity. If the current price for these bonds is $1,274.35, what is the annualized yield to maturity? A. 6.12% B. 7.40% C. 7.81% D. 6.00%

Answer #1

Answer = **B.7.40%**

Note:

The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

= [$ 60+ ( $ 1,000- $ 1274.35) /16] /[( $ 1,000+ $ 1274.35)/2] *100

= 42.853125/1137.175*100

= 3.768384374%

Annual YTM = 3.768384374%*2

= 7.54%

Note : Coupon = Rate * Face Value

= 12%/2 * $ 1,000

= $ 60

Since this formula gives an approximate value, the financial calculators can be used alternatively.

where,

Par Value = $ 1,000

Market Price = $ 1274.35

Annual rate = 12% and

Payments = Semi Annual

Maturity in Years = 12 Years

**Hence the yield to maturity
= 7.40%**

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