Question

Yield to Maturity and Call with Semiannual Payments Thatcher Corporation's bonds will mature in 12 years. The bonds have a face value of $1,000 and an 11.5% coupon rate, paid semiannually. The price of the bonds is $1,050. The bonds are callable in 5 years at a call price of $1,050. Do not round intermediate calculations. Round your answers to two decimal places. What is their yield to maturity?

Answer 1

rounding to two decimal places: 11.11%

Step-by-step explanation:

we can se the approximate formula for YTM

`YTM = (C + (F-P)/(n ))/((F+P)/(2))`

C= 57.5 (1,000 x 11.5%/2)

Face value = 1000

P= 1050 (market value)

n= 24 (12 years x 2 payment per year)

`YTM = (57.5 + (1,00 - 1,050)/(24))/((1,000+1,050)/(2))`

semiannual YTM = 5.4065041%

This is a semiannual rate as we consider semiannula payment.

We need to convert into annual rate:

`(1 + 0.054065041)^(2)  - 1`

YTM 11.1053109921343000%

rounding to two decimal places: 11.11%