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%