Question

Wayward.com RM1,000 par value bonds have a 4% coupon paid semi-annually. They will mature in 6 years and are currently selling at RM1,015. The yield to maturity for these bonds is Select one: a. 1.56% b. 1.86% c. 2.86% d. 2.56%

Answer 1

The yield to maturity for the Wayward.com bonds is 3.73%.

The yield to maturity (YTM) is the total return anticipated on a bond if it is held until it matures. The computation of the yield to maturity considers the annual interest payments, the current market price, and the time to maturity.

The yield to maturity formula:

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

Where:

C = annual coupon payment

FV = face value of the bond

P = current market price of the bond

n = number of years to maturity

Bond's par (face) value = RM1,000

Coupon rate = 4% per annum

Coupon rate per semi-annual period = 2% (4% ÷ 2)

Maturity period = 6 years

Current sales price = RM1,015

Here:

C = 4% of RM1,000 = RM40

Semi-annual payment = RM20 (RM40 ÷ 2)

FV = RM1,000

P = RM1,015

n = 6 years

YTM = (40 + ((1000 - 1015) / 6)) / ((1000 + 1015) / 2)

YTM = (40 + (-15/6)) / (2015/2)

YTM = (40 - 2.5) / 1007.5

YTM = 37.5 / 1007.5

YTM ≈ 0.0373 or 3.73%

Thus, we can conclude that the yield to maturity for the Wayward.com RM1,000 par value bonds is approximately 3.73%.