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Ice Cream World has bonds outstanding with an 8% coupon rate, $1,000 par, 19 years remaining...

Ice Cream World has bonds outstanding with an 8% coupon rate, $1,000 par, 19 years remaining until maturity, and a current price of $889. What is their yield to maturity? Please show work. 10.74% 7.87% 9.26% 11.00%

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Answer #1

Answer is 9.26%

Value of Bond can be calculated :

Value of bond = C / (1+YTM)^1 + C /(1+YTM)^2 ......................................... (C+P) / (1+YTM)^n

where C = Coupon payment

P = Par value

YTM = yield to maturity

n = number of years

Now in our case, Par value = $1000

Coupon rate = 8%

Coupon payment = $80

YTM = ?

Value of bond = $889

Number of years = 19 years

So 889 = 80 / (1+YTM)^1 + 80 /(1+YTM)^2 ......................................... (1080) / (1+YTM)^19

By hit and trial, YTM = 9.26%

We can also do this is excel using RATE () Formula

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