Final answer:
The Yield to Maturity (YTM) is calculated using the current market price, the face value, the coupon payment, and the number of periods left until maturity. For the given Ashburn Corporation's bonds, you would need to calculate the semiannual payments, determine the market price, and use these figures to solve for the YTM, which then needs to be annualized.
Step-by-step explanation:
The student asked how to calculate the yield to maturity (YTM) for Ashburn Corporation's 10-year bonds, which were issued two years ago at a coupon rate of 7.5%, make semiannual payments, and currently sell for 105 percent of their par value. To find the YTM, which is the total return expected on a bond if held to maturity, we need to solve for the interest rate that sets the present value of all future cash flows equal to the current price of the bond.
The steps for calculating YTM are as follows:
Determine the semiannual coupon payment: (7.5% / 2) * $1,000 = $37.50.
Identify the current market price of the bond: 105% of $1,000 = $1,050.
Since 2 years have passed, there are 8 years or 16 semiannual periods left.
Using a financial calculator or a YTM formula, input the current market price, the face value ($1,000), the semiannual coupon payment ($37.50), and the number of semiannual periods (16).
Solve for the YTM, keeping in mind it will be a semiannual rate, which needs to be doubled to annualize it.
The YTM is an important indicator of a bond's profitability and changes based on current market prices, which fluctuate with changes in market interest rates.