Question

The Sisyphean Company has a bond outstanding with a face value of $ 1 comma 000 $1,000 that reaches maturity in three three years. The bond certificate indicates that the stated coupon rate for this bond is 8.4 8.4​% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $ 1 comma 043 $1,043​, then the YTM for this bond is closest​ to:

Answer 1

7% annually

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. It is the long term return of the bond which is expressed in annual term.

Face value = F = $1,000

Coupon payment = $1,000 x 8.4% = $84/2 = $42 semiannually

Selling price = P = $1,043

Number of payment = n = 3 years x 2 = 6

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

Yield to maturity = [ $42 + ( $1,000 - $1,043 ) / 6 ] / [ ( $1,000 + $1,043 ) / 2 ]

Yield to maturity = [ $42 - 7.16 ] / $1,021.5

Yield to maturity = 0.0341% = 3.41% semiannually = 6.82% annually

Rounded off to whole percentage 7%