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Cricket Systems Co. plans to issue bonds with a par value of $1,000 and 30 years...

Cricket Systems Co. plans to issue bonds with a par value of $1,000 and 30 years to maturity. These bonds will pay $25 interest every 6 months. Current market conditions are such that the bonds will be sold to net $1,205.62. What is the yield to maturity (YTM) on an annual basis that a broker would quote to an investor.

Please answer without using a financial calculator and without using excel. The final answer is 3.84%.

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Answer #1

Solution :-

Face Value of Bond = $1,000

Semiannual Coupon rate = $1,000 * 2.5% = $25

Time to Maturity = 30 Years

Semiannual Period = 30 * 2 = 60

Price of Bond ( P ) = $1,205.62

YTM ( as per approximation )

YTM = 0.0195

Therefore Semiannual YTM = 1.95%

Therefore Annual YTM = 1.95% * 2 = 3.89%

As it is approximation formula we can not get exact 3.84% as it is based on some proportionational basis

and if you want to get exact answer you need to solve it by excel or through financial calculator

If there is any doubt please ask in comments

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