Question

A $1,000 par, 8%, 10 year bond, which pays semiannual coupons. The bond is callable in...

A $1,000 par, 8%, 10 year bond, which pays semiannual coupons. The bond is callable in 5 years at a call price of $1,050. If the current price of the bond is $1,100, what is its yield to maturity (YTM)?

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Answer #1

Yield to Maturity (YTM) of the Bond

The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables

Financial Calculator Keys

Figure

Face Value [$1,000]

FV

1,000

Coupon Amount [$1,000 x 8% x ½]

PMT

40

Yield to Maturity [YTM]

1/Y

?

Time to Maturity [10 Years x 2]

N

20

Bond Price [-$1,100

PV

-1,100

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the yield to maturity (YTM) on the bond = 6.62%

“Hence, the Yield to Maturity (YTM) of the Bond will be 6.62%”

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