Question

Beam Inc. bonds are trading today for a price of $1,394.15. The bond pays annual coupons with a coupon rate of 5% and the next coupon is due in one year. The bond has a yield to maturity of 2.62%. How many years are there until the bond matures?

Answer #1

Calculation of number of years to maturity(n): | |||

Market price(P)=$1394.15 | |||

Face value(F)= $1000 | |||

Yield to maturity(YTM)= 2.62% | |||

Coupon payment( C )= 1000*0.05= $50 | |||

Let Coupon payment= C | |||

YTM= | C+ (F-P)/n | ||

(F+P)/2 | |||

0.0262= | 50+(1000-1394.15)/n | ||

(1000+1394.15)/2 | |||

0.0262*1197.075= 50-394.15/n | |||

31.3634=50-394.15/n | |||

50-31.3634=394.15/n | |||

18.6366=394.15/n | |||

n= 21.15 years | |||

Therefore number of years to maturity is 21.15 years |

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