Question

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?

Answer 1

Information provided:

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:

FV= 1,000

PV= -900

PMT= 25

N= 10

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%.

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