Question

Sure Tea Co. has issued 4.2% annual coupon bonds that are now selling at a yield to maturity of 5.60% and current yield of 5.5353%. What is the remaining maturity of these bonds

Answer 1

33.29 years

Step-by-step explanation:

current yield = coupon / market price

0.055353 = 42 / market price

market price = 42 / 0.055353 = $758.77

using the yield to maturity formula we can determine the remaining time to maturity:

YTM = {coupon + [(face value - market value)/n]} / [(face value + market value)/2]

0.056 = {42 + [(1,000 - 758.77)/n]} / [(1,000 + 758.77)/2]

0.056 = {42 + [(1,000 - 758.77)/n]} / 879.385

0.056 x 879.385 = 42 + [(1,000 - 758.77)/n]

49.24556 = 42 + [(1,000 - 758.77)/n]

7.24556 = 241.23/n

n = 241.23 / 7.24556 = 33.29 years