Question

Jenny is looking to invest in some five-year bonds that pay semi-annual coupons at a coupon rate of 6.25 percent p.a. and are currently selling at $948.67. The face value is $1,000. What is the current market yield-to-maturity on such bonds? (USE EXCEL or FINANCIAL CALCULATOR. Round to the closest answer.)

Answer 1

Answer-

Face value = FV = $1000
Present value = PV = $ 948.67
Coupon payments = PMT = (6.25 % / 2) x $ 1000 = (0.0625 / 2 ) x $ 1000 = 0.03125 x $ 1000 = $ 31.25
Number of periods = N = 5 x 2 = 10
As the bonds are semi annual therefore the PMT  & N are calculated accordingly [ Coupon payments are done twice an year and number of periods = 5 years = 10 semi annual periods ]

Yield to maturity = YTM = I/Y = ?

By substituting all the values in financial calculator we get

Yield to maturity = YTM = I/Y = 3.75 % semiannually = 3.75 % x 2 = 7.5 % annually

Therefore the current market yield to maturity of the bond = YTM = 7.5 %