Question

An engineer bought a $1000 bond of an American airline for $875 just after an interest payment had been made. The bond paid a 8% interest rate semiannually. What nominal rate of return did the engineer receive from the bond if he held it 13.5 years until its maturity?

a.4.85% b.7.3% c.14.6% d.9.7%

Answer 1

Yield to maturity (YTM) is Option D.9.7%

Approx. YTM = [Coupon + (Face value - Market value of bond)/total period] / [(Face value + Market value of bond) / 2]

or

We can find the yield to maturity using RATE function in excel as it gives the exact bond price mentioned in the question

frequency is semi annual, Years to maturity NPER or n = 13.5*2=27, Coupon payment per semi annual period or PMT (1000*(8%/2) = 40, Bond price PV given as 875, Par value or FV 1000

PV is entered as a negative figure

Rate(nper, PMT, PV,FV, Type)

RATE(27,40,-875,1000)

4.83916%

the above is semi annual rate hence annual rate is 4.8392%* 2 = 9.7% when rounded to one decimal place