Question

Suppose that General Electric has a bond issue that has 10 years until maturity. The bond pays a 6.00% annual coupon rate and has a face value of $1,000. If the bond currently trades at $1,075.00, what is the yield to maturity on the bond?

Answer 1

Par value of the bond = $1000
No.of years to maturity = 10 years
Current Market price = $1075
Annual Coupon rate = 6.00%.
Coupon Payment = $60

Market Price = CF₁/(1+r) + CF₂(1+r)²+ ........Last CF/(1+r)ⁿ
Calculating r from the above formula is a trial and error process, so we use the below approx YTM calculation formula.
Approx YTM = C+{(F-P)/n}/(F+P)/2
C= Coupon Payment
F= Face value of the bond
P= Market price
n= No.of years to maturity
   = 60+{(1000-1075)/10}/{(1000+1075)/2}
   = (60-7.5)/1037.5
   = 5.06%
     
   Approximate yield to maturity is 5.06%