Question

A Japanese company has a bond that sells for 96.318 percent of its $100,000 par value. The bond has a coupon rate of 3.4 percent paid annually, and matures in 16 years. What is the yield to maturity of this bond?(NOTE: you have to solve this problem using the trial and error method)

Answer 1

To determine the yield to maturity of the bond, use the trial and error method by trying different interest rates until finding the rate that makes the present value of the bond equal to its current price.

Step-by-step explanation:

To determine the yield to maturity of the bond, we need to use the trial and error method by trying different interest rates until we find the rate that makes the present value of the bond equal to its current price. In this case, the bond is selling for 96.318% of its par value ($100,000), which is equivalent to $96,318.

We can start with a guess of 3% for the yield. Using this yield, we can calculate the present value of the bond's future cash flows (interest payments and the par value) and see if it equals $96,318.

If the calculated present value is lower than $96,318, we need to try a higher yield. If the present value is higher than $96,318, we need to try a lower yield. We repeat this process with different yields until we find the yield that makes the present value equal to the bond's price.