Question

Alafaya's bond has a coupon rate of 9.25% has a current yield of 9.50%. What is its yield to maturity? The bond has 5 years to maturity.

Answer 1

Current Yield = Annual interest / Current price

.095 = (1000*9.25%) / Current price

= 92.5/Current price

Current price = 92.5/.095

= 973.684210526

note: It is general practice to take $1,000 as face value when no details are given.

Yield To Maturity(YTM) = (interest per period+ ((Redemption price - Current market price) / life remaining to maturity)) / ((.4*Redemption price)+ (.6*Current market price))

= (92.5+ ((1000-973.684210526) / 5)) / ((.4*1000)+ (.6*973.684210526))

= 97.7631578948 / 984.210526316

= 0.0993315508

= 9.93%