Question

The bonds issued by Stainless Tubs bear a 6 percent coupon,
payable **semiannually**. The bonds mature in 11 years
and have a $1,000 face value. Currently, the bonds sell for $646.
What is the yield to maturity?

3.07 percent

5.92 percent

6.14 percent

11.84 percent

Answer #1

**Correct option is "D" - 11.84%**

There are two semiannual period in a year comprising of 6 months each

Semiannual interest = 1000*6%*6/12 = 30

Semiannual months =11 years *2 = 22

Yield to maturity = [Interest+ (Face value-purchase price)/semiannual months ]/[(Face value +purchase price)/2]

= [30+ (1000-646 )/22 ]/[(1000+646)/2]

= [30 +(354/22)]/[1646/2]

=[30+ 16.09091 ]/823

= 46.09091/823

= .056 or 5.60% semiannually

Annual yield to maturity = 5.60 *2 = 11.20% (approx to 11.84%)

**This method provides yield on approximate basis.

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