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The market price is $585 for a 10-year bond ($1,000 par value) that pays 8 %...

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.

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Answer #1

Information provided:

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:

FV= 1,000

PV= -585

PMT= 40

N= 20

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%.

In case of any query, kindly comment on the solution.

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