Question

Ashburn Corporation issued 15-year bonds two years ago at a coupon rate of 7.9 percent. The bonds make semiannual payments. If these bonds currently sell for 109 percent of par value, what is the yield to maturity (YTM)?

Answer 1

The yield to maturity for the bond is approximately 7.94%.

Step-by-step explanation:

The yield to maturity (YTM) is the total return an investor can expect to receive from a bond if it is held until maturity. To calculate the YTM, we need to use the current market price of the bond and the bond's cash flows.

In this case, the bond is selling for 109% of par value, which means it is selling for $1,090 per $1,000 face value. The bond has a 15-year maturity and a coupon rate of 7.9%, which pays semiannual payments.

To calculate the YTM, we can use the formula:

YTM = (Coupon Payment + ((Par Value - Current Price) / Number of Years)) / ((Par Value + Current Price) / 2)

Substituting the given values into the formula:

YTM = (39.5 + ((1000 - 1090) / 15)) / ((1000 + 1090) / 2) = 0.0794.

The yield to maturity for the bond is approximately 7.94%.