Question

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.

Answer #1

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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Round your answers to 2 decimal places.)
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