Question

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?

Answer 1

The yield to maturity using approximation formula is computed as shown below:

YTM = [Coupon payment + ((Face value – Price) /N)] / [ (Face value + Price) / 2 ]

= [ $ 25 + (($ 1,000 - $ 1,205.62) / 60) ] / [ ($ 1,000 + $ 1,205.62) / 2 ]

= $ 21.573 / $ 1,102.81

= 1.956184656%

To get in on annual basis, we will multiply the above rate by 2 as shown:

= 1.956184656% x 2

= 3.91% Approximately

The YTM can also be calculated using the financial calculator as shown below:

Plug the below figures in the financial calculator as shown:

PV = - 1,205.62

FV = 1,000

N = 60

PMT = 25

Press CPT and then press I/Y. It will give I/Y equal to 1.919890429%

To get in on annual basis, we will multiply the above rate by 2 as shown:

= 1.919890429% x 2

= 3.84% Approximately

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