Question

# West Corp. issued 14-year bonds 2 years ago at a coupon rate of 9.8 percent. The...

West Corp. issued 14-year bonds 2 years ago at a coupon rate of 9.8 percent. The bonds make semiannual payments. If these bonds currently sell for 103 percent of par value, what is the YTM?

Calculation of Yield to maturity

Yield to maturity can be calculated using Rate function of Excel

=RATE(nper,pmt,pv,fv)

where nper is the number of years to maturity i.e (14 - 2) * 2 = 24 (Given that bonds are issued two years ago so there are 12 years left for maturity and since there is semiannual coupon payment we multiply it by 2 )

pmt is coupon payment = 1000 * 9.8% = 98 / 2 = 49 (Divided by 2 as semiannual coupon payment)

pv is the current market price i.e 1030 (1000 * 103%)

fv is the face value i.e 1000

As face value is not given we aaume it to be \$1000

=RATE(12,49,-1030,1000)

Therefore on solving

Yield to maturity is 4.68911%(Semiannual)

Yield to maturity is 4.68911% * 2 = 9.37822% or 9.38% (Annual)

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