Question

Jone Company's bonds currently sell for $1,180 and have a par value of $1,000. They have 8.5% coupon rate and have a 15-year maturity, but they can be called in 6 years at $1,200. What is their yield to maturity (YTM)?

Answer 1

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

= [$ 85+ ( $ 1,000- $ 1,180) /15] /[( $ 1,000+ $1,180)/2] *100

= 73/ 1,090*100

= 6.70%

Note : Coupon = Rate * Face Value

= 8.5% * $ 1,000

= $ 85

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

where,

Par Value = $ 1,000

Market Price = $ 1,180

Annual rate = 8.5% and

Maturity in Years = 15 Years

Hence the yield to maturity = 6.58%

Hence the correct answer is 6.58%