Question

 ​Fitzgerald's 25​-year bonds pay 8 percent interest annually on a $1,000 par value. If the bonds sell at $935​, what is the​ bond's yield to​ maturity? What would be the yield to maturity if the bonds paid interest​ semiannually?

1.The​ bond's yield to maturity if the bond pays interest annually is?

2. The​ bond's yield to maturity if the bond paid interest semiannually would be?

Answer 1

1.) Face Value = $1000

Annual Coupon Payment = 8% of 1000 = $80

Price = $935

Number of periods = 25

Using financial calculator,

N = 25, PV = -935, PMT = 80, FV = 1000 and compute I/Y = 8.6427%

YTM = 8.6427%

2.)

Face Value = $1000

Annual Coupon Payment = 8% of 1000 = $80. Therefore, semi-annual Coupon = 80/2 = $40

Price = $935

Number of periods = 25 x 2 = 50

Using financial calculator,

N = 50, PV = -935, PMT = 40, FV = 1000 and compute I/Y = 4.3193%

This is the semi-annual rate. Therefore, YTM = 4.3193% x 2 = 8.6386%