Question

EHealth Corporation has $1,000 par value bonds with 4 years to maturity. The bonds pay an 8% coupon rate with semi-annual coupon interest payments. The bond's closing price is quoted at 103.75. Suppose you purchase the bond for the closing price. What is the bond's yield to maturity?

Answer 1

Yield to Maturity(YTM) = 3.47%

Step-by-step explanation:

The yield to maturity is the required rate of return (discount rate) that would equate the price of the bond and cash outflow expected from the bond. The yield on the bond can be determined as follows using the formula below:

YTM = C + F-P/n) ÷ 1/2 (F+P)

YTM-Yield to maturity-

C- coupon

F- Face Value

P- Current Price

DATA

Coupon = coupon rate × Nominal value = 1,000 × 8%× 1/2=40(note we divide by 2 because interest is paid semi-annually)

n= 4×2 = 8 (note there 2 half months in a year)

Face Value = 1000

YM-?, C-40, Face Value - 1,000, P-103.75/100× 1000 = 1037.5

YM = (40 + (1000-1037)/8) ÷ ( 1/2× (1000 + 1037.5 ) ) =0.0347

YM = 0.0347 × 100 = 3.47%

Yield to Maturity = 3.47%