Question

The market price is ​$775 for a 20​-year bond ​($1,000 par​ value) that pays 11 percent annual​ interest, but makes interest payments on a semiannual basis ​(5.5 percent​ semiannually). What is the​ bond's yield to​ maturity?

A. The​ bond's yield to maturity is (?) %.

Answer 1

The yield to maturity is computed as follows:

Plug the below variables in the financial calculator as follows:

FV = 1,000

PV = - 775

PMT = 55 (5.5% x 1,000)

N = 40 (20 x 2)

Finally press CPT and then I/Y. It will give I/Y equal to 7.233679015%

Now since the payments are on a semi annual basis, hence the above rate shall be multiplied by 2 as follows:

= 7.233679015% x 2

= 14.47% Approximately

We can also use the excel function as follows:

= RATE(N,PMT,PV,FV)

= RATE(40,55,-775,1000)

It will also give I/Y equal to 7.233679015%

Now since the payments are on a semi annual basis, hence the above rate shall be multiplied by 2 as follows:

= 7.233679015% x 2

= 14.47% Approximately

Do ask in case of any doubts.