Question

Footsteps company has a bond outstanding with a coupon rate of 5.2 percent and annual payments. The bond currently sells for 1,012.50, matures in 16 years, and has a par value of 1,000. What is the yield to maturity (YTM) of the bond?

Answer 1

The yield to maturity (YTM) of the Footsteps company bond is 3.92%.

Step-by-step explanation:

The yield to maturity (YTM) of a bond is the effective rate of return anticipated on a bond if it is held until it matures. To calculate the yield to maturity of the Footsteps company bond, we need to use the formula:

YTM = (Annual Interest Payment + (Face Value - Bond Price) / Bond Price ) x (1 / Maturity Period)

Here's how to calculate it using the given information:

1. Annual Interest Payment = Coupon Rate x Face Value = 5.2% x $1,000 = $52
2. Bond Price = $1,012.50
3. Maturity Period = 16 years
4. YTM = ($52 + (($1,000 - $1,012.50) / $1,012.50)) x (1 / 16) = $52 - $12.50 / $1,012.50 x 0.0625 = 0.0392, or 3.92%

Therefore, the yield to maturity of the Footsteps company bond is 3.92%.