Question

5) Century Industries has issued a bond which has a $1,000 par value and a 15 percent annual coupon interest rate. The bond will mature in 10 years and currently sells for $1,250. Using this information, the yield to maturity on the Century Industries bond is ________.

Answer 1

Answer:

11.1%

Explanation:

Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity. It is the long term yield which is expressed in annual term. Normally yield rate is based on the default risk to which investor is exposed to, higher risk higher yield and lower risk lower yield.

As per given data

Face value = F = $1,000

Coupon payment = $1,000 x 15% = 150

Selling price = P = $1,250

Number of periods = n = 10 years

Formula for YTM is given below

Yield to maturity = [ C + ( F - P ) / n ] / [ (F + P ) / 2 ]

Placing values in the above formula

Yield to maturity = [ $150 + ( 1000 - $1,250 ) / 10 ] / [ (1,000 + $1,250 ) / 2 ]

Yield to maturity = [ $150 - 25 ] / $1,125 = $125 /$1,125 = 0.111 = 11.1%