Question

Roxy Bonds will mature in 16 years, the coupon rate of the bond is 5% paid SEMIANNUALLY, if the bonds currently sell for $1180 what is the bond’s yield to maturity?

3.52% |
||

2.50% |
||

4.62% |
||

5.00% Please do not solve through excel, I need to learn by hand for class |

Answer #1

Number of periods to Maturity = 16*2 = 32

PMT = 5%*1000/2 = $25

Par Value= $1000

Market Price = $1180

Using approximation method -

Yield to maturity = (PMT + (Par Value - Market Price)/Number of periods to Maturity) / ((Par Value + Market Price)/2)

= (25 + (1000 - 1180)/32) / ((1000 + 1180)/2) = 0.0177 or 1.77% semiannual

Annual YTM = 1.77*2 = 3.54%

Actual Formula to compute YTM --

PV = P[1 - (1+r)^{-n}]/r + FV/(1+r)^{n}

Where, PV = market price of bond,

P = coupon payment

r is the YTM

n is the number of periods to maturity

FV is the par value of the bond

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