Question

Crossfade Corp. has a bond with a par value of $2,000 that sells for $1,910.50. The bond has a coupon rate of 7.05 percent and matures in 19 years. If the bond makes semiannual coupon payments, what is the YTM of the bond

Answer 1

Yield to maturity of the bond is 7.5%

Step-by-step explanation:

Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity.

Face value = F = $2,000

Coupon payment = $2,000 x 7.05% = $141/2 = $70.5 semiannually

Selling price = P = $1910.50

Number of payment = n = 19 years x 2 = 38

Yield to maturity = [ C + ( F - P ) / n ] / [ (F + P ) / 2 ]

Yield to maturity = [$70.5 + ( 2,000 - 1,910.50 ) / 38 ] / [ (2,000 + 1,910.50 ) / 2 ]

Yield to maturity = 72.86 / $1,955.25

Yield to maturity = 3.73% Semiannual

Yield to maturity = 7.5% annually