Question

****PLEASE SHOW IN EXCEL***

2. Xerox Corporation issues a 4 percent coupon bond with 28 years maturity, $1,000 face (par) value, and semi-annual coupon payments. If the current market price of this bond is $1271, find its yield to maturity.

A.                 5.97%  

B. 2.05%

C. 2.63%

D. 4.31%

E. none of the answers is correct

Answer 1

Yield to maturity = (Coupon + ((P - M)/n)) / ((P + M) / 2)

Here,

P (Par value) = $1,000

M (Market price) = $1,271

n (periods semi annual)  = 28 years * 2 = 56

Coupon = Par value * Coupon rate * 6/12 months

Coupon = $1,000 * 4% * 6/12 = $20

Now, put the values into formula,

Yield to maturity = ($20 + (($1,000 - $1,271)/56)) / (($1,000 + $1,271) / 2)

Yield to maturity = ($20 - $4.84) / $1,135.50

Yield to maturity = $15.16 / $1,135.50

Yield to maturity (semi annual) = 0.0133 or 1.33%

Yield to maturity (annually) = 1.33% * 2

Yield to maturity (annually) = 2.66%

Answer : C. 2.63%

Note : Decimal point difference in answer is due to decimal rounding off.