Question

West Corp. issued 16-year bonds 2 years ago at a coupon rate of 9.7 percent. The bonds make semiannual payments. If these bonds currently sell for 96 percent of par value, what is the YTM

Answer 1

Yield to Maturity [YTM] of the Bond

Yield to Maturity [YTM] = Coupon Amount + [(Par Value – Bond Price) / Maturity Years] / [(Par Value + Bond Price)/2]

Par Value = $1,000

Semi-annual Coupon Amount = $48.50 [$1,000 x 9.70% x ½]

Bond Price = $960 [$1,000 x 96%]

Maturity Years = 28 Years [(16 Years – 2 Years) x 2]

Therefore, Yield to Maturity [YTM] = Coupon Amount + [(Par Value – Bond Price) / Maturity Years] / [(Par Value + Bond Price)/2]

= [$48.50 + {($1,000 – $960) / 28 Years)] / [($1,000 + $960) / 2}]

= [($48.50 + $1.439) / $980]

= 0.0512

= 5.12%

Semi-annual YTM = 5.12%

Therefore, the annual YTM = 10.24% [5.12% x 2]

“Hence, the Yield to Maturity [YTM] of the Bond = 10.24%”