Question

The bonds of Memorial Corporation are currently selling for $1,084.72. These bonds mature in 7 years, have a coupon rate of 7.5 percent (payable semiannually) and a face value of $1000. What is the bond’s yield to maturity? Select one: a. 3.75% b. 3.00% c. 6.00% d. 5.00% e. 7.50%

Answer 1

The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

= [$37.50+ ( $ 1,000- $ 1084.72 ) /14 ] /[( $ 1,000+ $ 1084.72)/2] *100

= 31.44857143/1042.36*100

= 3.017054706%

Annual YTM = 3.017054706% * 2

= 6.03%

Note : Semi Annual Coupon = Rate * Face Value

= 7.5% /2 * $ 1,000

= $ 37.50

Since this formula gives an approximate value, the financial calculators can be used alternatively.

where,

Par Value = $ 1,000

Market Price = $  1,084.72

Annual rate = 7.5% and

Maturity in Years = 7 Years

Payments = Semi Annual

Hence the Semi Annual yield to maturity = 3.00%

yield to maturity = 3.00% * 2

= 6.00%

Answer : c. 6.00%