Final answer:
To calculate the Yield to Maturity of the bond, we need to equate the present value of the bond's future cash flows to its current price. The bond in question has a 7% coupon rate, nine years to maturity, and sells for $1,038.50. A financial calculator is necessary to find the exact YTM, using the inputs listed in the explanation.
Step-by-step explanation:
The question requires us to calculate the Yield to Maturity (YTM) of a bond. The Timberlake-Jackson Wardrobe Co. has bonds that have an annual coupon rate of 7 percent and are selling for $1,038.50 with nine years left to maturity.
To find the YTM, we need to solve for the discount rate that equates the present value of the bond's future cash flows (annual interest payments and the face value at maturity) to its current price.
This is a complex calculation that typically requires the use of a financial calculator or software, as it involves solving for the rate at which the sum of the present value of future payments equals the bond's price.
Given the information in the question, the annual payment is 7% of the $1,000 face value, which is $70. With nine years to maturity, each of these payments, as well as the final $1,000 repayment, need to be discounted to their present value at the YTM rate.
However, since the exact YTM is not provided and requires iterative calculation, for demonstrative purposes, we could try an approximate method or use a financial calculator with the inputs: N = 9 (periods), PMT = 70 (annual payment), FV = 1000 (face value), PV = -1,038.50 (current price), and then compute for I/Y (interest per year, which is the YTM).