Question

What is the Yield to Maturity (YTM) for a bond which pays 6% per year and matures in 10 years. The current price of the bond is $980, and the Future Value to be at Par $1000.

Answer 1

The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

= [$ 60+ ( $ 1,000- $ 980 ) /10] /[( $ 1,000+ $ 980)/2] *100

= 62/990*100

= 6.26%

Note : Coupon = Rate * Face Value

= 6% * $ 1,000

= $ 60

Since this formula gives an approximate value, the financial calculators can be used alternatively.

where,

Par Value = $ 1,000

Market Price = $  980

Annual rate = 6% and

Maturity in Years = 10 Years

Hence the yield to maturity = 6.28%

Answer = 6.28%