Question

Mia Noodles Company's bonds have 12 years remaining to maturity. Interest is paid semi-annually, the bonds have a $1000 face value, and the annual coupon interest rate is 10%. The bonds sell at a price of $850. What is the bond's annualized yield to maturity?

Select one:

a. 12.48 percent

b. 12.44 percent

c. 11.92 percent

d. Error 5

e. 6.22 percent

Answer 1

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

= [$ 50+ ( $ 1,000- $ 850) /24] /[( $ 1,000+ $ 850)/2] *100

= 56.25/925*100

= 6.08%

Annual YTM = 6.08% * 2

= 12.16%

Note :Semi Annual Coupon = Rate * Face Value

= 10%/2 * $ 1,000

= $ 50

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

where,

Par Value = $ 1,000

Market Price = $  850

Annual rate = 10% and

Maturity in Years = 12 Years

Payments = Semi Annual

Hence the yield to maturity = 12.44%

Answer = b. 12.44 percent