Question

A 7% semiannual coupon bond with a $1000 par value matures in 5 years and currently sells for $946, what is the yield to maturity?

Answer 1

  

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Current Price = 946

Coupon 7% / 2 = 0.035

Maturity = 5 years * 2 = 10

SInce the Current Price of Bond > Par Value, the TYM will be less than Coupon.

Let's assume the YTM be 8%/ 2 = 0.04

Value of Bond =

=

= 959.45

Now,

Let's assume the YTM be 9% / 2 = 0.045

Value of Bond =

=

= 920.87

Using interpolation

YTM =

= 8% + ((959.45 - 946) / (959.45 - 946) + (946 - 920.87)) * (9-8)

= 8% + 0.34%

= 8.34%