Question

Jane Almeda is interested in a 10-year bond issued by Roberts Corp. that pays a coupon of 10 percent annually. The current price of this bond is $1,174.45. What is the yield that Jane would earn by buying it at this price and holding it to maturity

Answer 1

Answer:

The yield that Jane will earn by buying it at this price and holding it to maturity is 7.59%

Explanation:

Yield to maturity is the rate of expected return on a bond which is held until the maturity. It is considered as a long term return and expressed in annual terms.  

According to given data

Coupon payment = C = 1,000 x 10% = $100

Face value = F = $1,000

Price  = P = $1,174.45

Number of year to mature = 10

Use following formula yo calculate YTM

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

Yield to maturity = [ $100 + (1,000-1,174.45)/10 ] / [ (1,000+1,174.45)/2 ]

Yield to maturity = 82.55 / 1,087.23 = 0.0759 = 7.59%

Answer 2

Answer: The yield that Jane will earn if she buys it at this price and holds it to maturity will be 7.593%

Explanation:

Yield to maturity (also known as book yield or redemption yield refers to the entire return that is expected or anticipated on a bond, assuming that the bond is held till maturity. It can also be put as the rate of return of an investment so long as an investor holds the bond till it matures.

To solve yield to maturity, there are a number of variables that must be worked with to get it unraveled. In this case:

Current price = 1,174.45 us dollars

Contractual interest rate = 10%(0.1)

Years to maturity = 10 years

Face value = 1,000 us dollars

Coupon payment = face value × contractual interest rate

i.e C = 1000 × 10%(0.1)

= 1000 × 0.1 = 100 us dollars

Yield to maturity = [100 + ((1000 - 11745.45)/10)]/[(100 + 1,174.45)/2].

= 82.555/1,087.225

= 0.075931

= 7.593%

Therefore the yield that Jane will earn if the bond is purchased at this price and held till maturity will be 7.593%