A bond has five years to maturity, and has a semi-annual coupon that corresponds to an annual coupon rate of 5%. The face value of the bond is $1,000. The bond has a current market price of $900. What is the implied interest rate of the bond?
Face value= future value= $1,000
Market value= current price= $900
Time= 5 years*2= 10 semi-annual periods
Coupon rate= 5%/2= 2.50%
Coupon payment= 0.025*1,000= $25
The implied interest rate is calculated by computing the yield to maturity.
Enter the below in a financial calculator to compute the yield to maturity:
Press the CPT key and I/Y to compute the yield to maturity.
The value obtained is 3.7155.
Therefore, the implied interest rate is 3.7155%*2= 7.4310%7.43%.
In case of any query, kindly comment on the solution.
Get Answers For Free
Most questions answered within 1 hours.