Question

Ezzell Enterprises' noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Answer 1

Answer:

Yield to Maturity = 7.96%

Explanation:

As coupon value and maturity value are given, we will use the following formula to determine YTM instead of trial and error method.

We know,

Yield to Maturity = $\frac{I + \frac{M - V_{0}}{n}}{\frac{2M + V_{0}}{3}}$

Given,

I = coupon payment = $95

M = Par value = $1,000

$V_{0}$ = Value of bond at maturity = $1,165

n = number of period (years) = 15

Therefore,

Yield to Maturity = $\frac{95 + \frac{1,000 - 1,165}{15}}{\frac{(2*1,000) + 1,165}{3}}$

or, Yield to Maturity = $\frac{95 + \frac{-165}{15}}{\frac{2,000 + 1,165}{3}}$

or, Yield to Maturity = $\frac{95 - 11}{1,055}$

or, Yield to Maturity = $(84 ÷ 1,055)

Therefore, Yield to Maturity = 0.0796 = 7.96%