Question

14-year bond for Rusk Corporation has a market price of $875 and a par value of $1,000. If the bond has an annual interest rate of 11 percent, but pays interest semiannually, what is the bond’s yield to maturity?

Answer 1

Bond Tenure = 14 years or (14 x 2) = 28 half-years, par value = $ 1000, Market Price = $ 875, Coupon Rate = 11% payable semi-annually, Let the YTM be 2r

Semi-Annual Coupon = 0.5 x 0.11 x 1000 = $ 55

Therefore, 875 = 55 x (1/r) x [1-{1/(1+r)^(28)}] + 1000 / (1+r)^(28)

Using EXCEL's Goal Seek Function/ hit and trial method/ a financial calculator to solve the above equation, we get:

r = 0.06479 or 6.479% ~ 6.48 %

Yield to Maturity = 2 x r = 2 x 6.48 = 12.96 %