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
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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