Question

Harrimon Industries bonds have 6 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 8%.

1. What is the yield to maturity at a current market price of
   
   1. $741? Round your answer to two decimal places.
      
   2. $1,064? Round your answer to two decimal places.

Answer 1

Bonds are financial instruments that provide fixed returns to its holders. Bonds actually have a nature of debt with a fixed interest rate and a maturity, also known as Plain Vanilla Bond.

Yield is the return generated on the bond investment. It considers the future cash flows from the bond and variations in the price of the bond.

It can be calculated as:

Where C denotes the Coupon amount or 8% of $ 1,000 = $ 80

r denotes the Yield to Maturity

n denotes the Time to Maturity or 6

Part 1

Calculate r when the Price is $ 741

Thus, the YTM is 14.81% when the Price is $ 741

Part 2

Calculate r when the Price is $ 1064

Thus, the YTM is 6.67% when the Price is $ 1064