Question

Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $832. The yield to maturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature? A. 2.10 years B. 4.19 years C. 7.41 years D. 9.16 years E. 18.32 years

Answer 1

A. 2.10 years

Step-by-step explanation:

Use following formula to calculate the numbers of years to maturity of the bond.

Price of the bond = [ Periodic Coupon payment x ( 1 - ( 1 + periodic yield to maturity )^-numbers of periods ) / Periodic yield to maturity ] + [ Face value / ( 1 + periodic yield to maturity )^numbers of periods

where

Price of the bond = $832

Periodic Coupon payment = $1,000 x 6.5% x 6/12 = $32.5

Periodic yield to maturity = 16.28% x 6/12 = 8.14%

Face value = $1,000

Numbers of periods = ?

Placing values in the formula

$832 = [ $32.50 x ( 1 - ( 1 + 8.14% )^-numbers of periods ) / Periodic 8.14% ] + [ $1,000 / ( 1 + 8.14% )^numbers of periods ]

Numbers of periods = 4.20 period

Numbers of years = 4.20 x 12/6 = 2.10 years