Question

The Sisyphean Company has a bond outstanding with a face value of $ 1 comma 000 that reaches maturity in five years. The bond certificate indicates that the stated coupon rate for this bond is 8.3 ​% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $ 1079 ​, then the YTM for this bond is closest​ to: A. 8.99 ​% B. 6.42 ​% C. 7.71 ​% D. 5.1 ​%

Answer 1

Information provided:

Face value= future value= $1,000

Present value= $1,079

Time= 5 years*2= 10 semi-annual periods

Coupon rate= 8.3%/2= 4.15%

Coupon payment= 0.0415*1,000= $41.50

The yield to maturity of the bond is calculated with the help of a financial calculator.

The below is entered in a financial calculator to calculate the yield to maturity:

FV= 1,000

PV= -1,079

N= 10

PMT= 41.50

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 3.21% for a semi-annual period and 3.21%*2= 6.42% for an annual period.

Hence, the answer is option b.