Question

a bond with a face value of $1,000 has 12 years until maturity, has a coupon rate of 5.4%, and sells for $1,087. what is the yield to maturity if interest is paid once a year? note: do not round intermediate calculations. enter your answer as a percent rounded to 4 decimal places. what is the yield to maturity if interest is paid semiannually? note: do not round intermediate calculations. enter your answer as a percent rounded to 4 decimal places.

Answer 1

If interest is paid annually the YTM is 4.48% and if interest is paid semi annually YTM is 2.24%. YTM means Yield to maturity that is paid on bonds ,to determine YTM we first calculate interest on the bonds which is explained below. Formula for YTM is given in the attachment.

Interest is paid annually
Annual Interest = 1000*5.4% = 54

YTM = [54 +(1000 - 1087)/12] /(1000+1087)/2 = 46.75 /1043.5

YTM = 4.480%

Interest paid semi annually

Interest = 1000*5.4% = 54/2 = 27

YTM = [27 + (1000 -1087)/24] / (1000+1087)/2 = 23.375/1043.5

YTM = 2.240%

In the above equation, time period is 24(12*2) because time period is semi annual.

A fixed-rate investment, such as a bond, has a speculative rate of return or interest known as yield to maturity (YTM), also known as redemption or book yield. The YTM is predicated on the idea or understanding that an investor buys the security at the current market price and retains it until it matures (reaches its full value), as well as the assumption that all interest and coupon payments are made on schedule.

Learn more about bonds here

brainly.com/question/25596583

#SPJ4