Question

The market price is $1,050 for a 9 -year bond ($1,000 par value) that pays 9 percent annual interest, but makes interest payments on a semiannual basis (4.5 percent semiannually). What is the bond's yield to maturity?

Answer 1

Information provided:

Par value= future value= $1,000

Market price= present value= $1,050

Time= 9 years*2= 18 semi-annual periods

Coupon rate=9%/2= 4.50%

Coupon payment= 0.045*1,000= $45

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -1,050

N= 18

PMT= 45

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

The value obtained is 4.10.

Therefore, the yield to maturity is 4.10*2= 8.20%.

In case of any query, kindly comment on the solution.