Question

Ezzell Enterprises' noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Answer 1

Yield to Maturity = 7.96%

Step-by-step explanation:

As coupon value and maturity value are given, we will use the following formula to determine YTM instead of trial and error method.

We know,

Yield to Maturity =
`(I + (M - V_(0))/(n))/((2M + V_(0))/(3))`

Given,

I = coupon payment = $95

M = Par value = $1,000

`V_(0)` = Value of bond at maturity = $1,165

n = number of period (years) = 15

Therefore,

Yield to Maturity =
`(95 + (1,000 - 1,165)/(15))/(((2*1,000) + 1,165)/(3))`

or, Yield to Maturity =
`(95 + (-165)/(15))/((2,000 + 1,165)/(3))`

or, Yield to Maturity =
`(95 - 11)/(1,055)`

or, Yield to Maturity = $(84 ÷ 1,055)

Therefore, Yield to Maturity = 0.0796 = 7.96%