Question

Tidewater Home Health Care, Inc. has a bond issue outstanding with eight years remaining to maturity, a coupon rate of 10 percent with interest paid annually, and a par value of $1,000. The current market price of the bond is $1,251.22

a. What is the bond's yield to maturity?

b. Now, assume that the bond has semiannual coupon payments. What is its yield to maturity in this situation?

Answer 1

5.96%

6.00%

Explanation:

The yield to maturity can be computed using the rate formula in excel as shown below:

=rate(nper,pmt,-pv,fv)

nper is the number of annual interest payments of 8 years

pmt is the annual interest payment=$1000*10%=$100

pv is the current price of $1,251.22

fv is the face value of $1,000

=rate(8,100,-1251.22,1000)=5.96%

Semiannual coupon:

nper is the number of semiannual interest payments i.e 8*2=16

pmt is the semiannual interest payment=$1000*10%*6/12=$50

pv is the current price of $1,251.22

fv is the face value of $1,000

=rate(16,50,-1251.22,1000)=3.00%

semiannual yield to maturity is 3.00% while annual yield is 3.00% *2=6.00%