Question

The market price is ​$825 for a ​17-year bond ​($1,000 par​ value) that pays 9 percent annual​ interest, but makes interest payments on a semiannual basis ​(4.5 percent​ semiannually). What is the​ bond's yield to​ maturity?

Answer 1

The yield to maturity of the bond is 5.31%.

Step-by-step explanation:

The yield to maturity (YTM) is the annual rate of return an investor can expect to receive if the bond is held until maturity.

In this case, the market price of the bond is $825, which is below its face value of $1,000.

By using the formula:

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

where C is the annual interest payment, F is the face value, P is the market price, and n is the number of periods (in this case, 34), we can calculate the YTM of the bond. Plugging in the values:

YTM = (90 + (1000 - 825) / 34) / ((1000 + 825) / 2)

= 0.0531 or 5.31% (rounded to two decimal places).