Question

Crow Ltd's bonds are currently priced at $965.80. They have a $1,000 par value and 3 years to maturity. They pay an annual coupon of 5%. What is the annulaised yield to maturity on this bond.

Question 4 options:

	3.13%
	6.68%
	6.27%
	5.0%

Answer 1

Yield to Maturity of a bond is given by

YTM

= C + [ ( F – P ) / n ] / [ ( F + P ) / 2 ]

Where,

C = Annual Coupon

= Face Value x Coupon Rate

= $1,000 x 5%

= $50

F = Face Value of the Bond = $1,000

P = Current Price = $965.80

n = Years left to maturity = 3

So, putting the values in above equation we get

YTM

= $50 + [ ($1,000 - $965.80 ) / 3 ] / [ ( $1,000 + $965.80 ) / 2 ]

= ( $50 + $34.20 / 3 ) / $982.9

= $61.40 / $982.90

= 0.0625 or 6.25%

So, the nearest answer is option C