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?
Answer :
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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