The market price is $585 for a 10-year bond ($1,000 par value) that pays 8 % annual interest, but makes interest payments on a semiannual basis (4% semiannually). What is the bond’s yield to maturity?
Clearly show which EQUATIONS could be used to solve the problem mathematically
Indicate the detailed steps on how to use FINANCIAL CALCULATOR or Equations from the Textbook to solve the problems.
Par value= future value=$1000
Current price= $585
Coupon rate= 8%/2= 4%
Coupon payment= 0.04*1,000= $40
Time= 10 years*2= 20 semi-annual periods
The yield to maturity is calculated by entering the below in a financial calculator:
Press the CPT key and I/Y to compute the yield to maturity.
The value obtained is 8.3318.
Therefore, the yield to maturity is 8.3318%*2= 16.6635% 16.66%.
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