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Bonds issued by American Aero Inc. bear an 8% coupon, payable semiannually. The bonds mature in...

Bonds issued by American Aero Inc. bear an 8% coupon, payable semiannually. The bonds mature in 10 years and have a $1,000 face value. Currently the bonds sell for $675. What is the yield to maturity?

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Answer #1

Calculation of Yield to maturity :

Using Financial Calculator

=RATE(nper,pmt,pv,fv)

where nper is Number of years to maturity i.e 10 * 2 = 20 (Multiplied by 2 As coupons are paid semiannually)

pmt is Interest payment i.e 1000 * 8% = 80 / 2 = 40 (Divided by 2 As coupons are paid semiannually)

pv is Current Market Price

= 675

Note : pv should be taken as negative.

fv is face value i.e 1000

=RATE(20,40,-675,1000)

therefore ,Yield to maturity is 7.089%(Semiannual)

Yield to maturity is 7.089% * 2 = 14.18% (Annual)

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