Question

What is the yield to maturity of a bond if the bond is sold at $985.48 today, pays annual coupon of 7% and matures in 12 years? Round to the nearest hundredth percent. Do not include a percent sign in your answer. (i.e. If your answer is 4.32%, then type 4.32 without a % sign)

Answer 1

Step-by-step explanation:

• The Yield to Maturity [YTM] of a Bond is calculated by using the following formula = Yield to Maturity [YTM] = Coupon Amount + [ (Face Value – Bond Price) / Maturity Years] / [(Face Value + Bond Price)/2]

• Where, Coupon amount = $1000 x 7% x ½ = $35

• Face Value = $1,000

• Bond Price = $985.48

• Maturity Years = 12 years x 2 = 24 Periods

• Yield to Maturity [YTM] = Coupon Amount + [ (Face Value – Bond Price) / Maturity Years] / [(Face Value + Bond Price)/2]

• = $35 + [ ($1,000 – $985.48) / 24 Years)] / [($1,000 + $985.48) / 2]

• = [($35 – 0.605) / 992.74] x 100 = 3.46%

The Yield-to-Maturity (YTM) of this Bond = 3.46%