Question

New homes has a bond issue with the coupon rate of 5.5% that matures in 8.5 years the bonds have a par value of 1000 in the market price of 1022 interest is paid semiannually what is the yield to maturity

Answer 1

The formula for yield can be written as,

YTM = (Coupon + (Par Value -Market Price )/Time period to maturity)/0.5(par value+ market price)

For this particular problem, we have

coupon = (5.5% of 1000) = 27.5

Par Value = 1000

Market Value = 1022

Time periods to maturity = 8.5*2 = 17 (interest is paid semi-annually)

using these values in formula, we have

YTM (Semi annual) = (27.5 + (1000-1022)/17) / 0.5(1000+1022) = (27.5 - 1.294118)/1011 = 26.20588/1011 = 0.025921 or 2.5921% semiannual.

Therefore the annualized YTM would be 2.5921%*2 = 5.1842 %

Ans. 5.1842%

Please note that as the current price of the bond was higher than its face value, it was expected that the YTM would be less than coupon rate, our results are in line with this.

answered by: anonymous