Question

There is a bond that has a quoted price of 98.613 and a par value of $2,000. The coupon rate is 6.66 percent and the bond matures in 18 years. If the bond makes semiannual coupon payments, what is the YTM of the bond?

Answer 1

To calculate the yield to maturity (YTM) of a bond with a quoted price of 98.613 and a par value of $2,000, we need to use the bond's coupon rate and time to maturity. The YTM represents the total return an investor can expect to receive if they hold the bond until maturity.

Step-by-step explanation:

To calculate the yield to maturity (YTM) of a bond, we need to use the bond's quoted price, par value, coupon rate, and time to maturity. The YTM represents the total return an investor can expect to receive if they hold the bond until maturity.

First, we need to determine the annual coupon payment. Since the bond makes semiannual payments, we divide the coupon rate by 2 and multiply it by the par value:

Annual coupon payment: 6.66% / 2 * $2,000 = $133.20

Next, we calculate the number of periods the bond will make coupon payments. Since the bond matures in 18 years and makes semiannual payments, the number of periods is 18 * 2 = 36.

Now, we can calculate the YTM using a financial calculator or spreadsheet software. We can start with an initial guess, such as 5%, and then iterate until we find a yield that matches the bond's quoted price.