Question

Bond Yields Find the promised yield to maturity for a 7% coupon, $1,000 par 20 year bond selling at $1115.00. The bond makes semiannual coupon payments.

5.52%

6.07%

6.00%

6.22%

Answer 1

Answer: Yield to maturity = 2 × 3.037 = 6.07%

Given:

Face Value = $1000

Bond Price = $1115

Semi annual coupon interest = 1000 ×
`(7 )/(2)` % = $ 35

We'll equate the semi yield to maturity, using the following formula:

Semi yield to maturity =
`((Face\ Value - Bond\ Price)/(n) + Coupon\ Interest)/((Face\ Value + Bond\ Price)/(2))`

where;

n = no. of semi annual period = 40

Using the value in above equation, we get

Semi yield to maturity =
`((1000 - 1115)/(40) + 35)/((1000 + 1115)/(2))`

Semi yield to maturity = 3.037%

Therefore , yield to maturity = 2 × 3.037 = 6.07%