A bond with a par value of $1,000 and a coupon rate of 8% (semiannual coupon) has a current yield of 7%. What is its yield to maturity? The bond has 8 years to maturity.
| Yield to maturity | 5.75% | |
Working:
| Step-1:Calculation of current price | ||||||||||||
| Annual coupon paid in cash | = | Par Value x Coupon rate | ||||||||||
| = | $ 1,000 | x | 8% | |||||||||
| = | $ 80 | |||||||||||
| Current Yield | = | Annual coupon/Current Price | ||||||||||
| 0.07 | = | $ 80 | / | Current Price | ||||||||
| Current Price | = | $ 80 | / | 0.07 | ||||||||
| Current Price | = | $ 1,142.86 | ||||||||||
| Step-2:Calculation of Yield to maturity | ||||||||||||
| Yield to maturity | = | =RATE(nper,pmt,-pv,fv)*2 | nper | 8*2 | = | 16 | ||||||
| = | =RATE(16,40,-1142.86,1000)*2 | pmt | 1000*8%*6/12 | = | $ 40 | |||||||
| = | 5.75% | pv | $ 1,142.86 | |||||||||
| Thus, | fv | $ 1,000 | ||||||||||
| Yield to maturity | 5.75% | |||||||||||
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