Question

Footsteps Co. has a bond outstanding with a coupon rate of 6 percent and annual payments. The bond currently sells for $980.26, matures in 24 years, and has a par value of $1,000. What is the YTM of the bond?

a) 6.15%
b) 5.85%
c) 6.40%
d) 5.75%

Answer 1

The YTM of the bond is 6.15%.

Step-by-step explanation:

The yield to maturity (YTM) of a bond is the rate of return an investor can expect to receive if the bond is held until maturity and all interest payments are reinvested at the YTM rate. To calculate the YTM of the bond in question, we can use the formula:

YTM = (Coupon Payment + (Face Value - Current Price) / Maturity Time) / ((Face Value + Current Price) / 2)

Substituting the given values:

YTM = (60 + (1000 - 980.26) / 24) / ((1000 + 980.26) / 2)

Simplifying the expression:

YTM = 0.0615 = 6.15%