Question

4. The E. Harris Company issued bonds in September of 2003. When issued, the bonds had 20 years to maturity, a coupon rate of 7.5% and sold for their face value of $1,000. Now, in September of 2013, the bond price has risen to $1,110.40. What is the current yield to maturity

Answer 1

Answer:

6%

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 return of the bond which is expressed in annual term.

Face value = F = $1,000

Coupon payment = $1,000 x 7.5% = $75

Selling price = P = $1110.40

Number of payment = n = 10 years

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

Yield to maturity = [ $75 + ( $1,000 - $1,110.4 ) / 10 ] / [ ( $1,000 + $1,110.4 ) / 2 ]

Yield to maturity = [ $75 - 11.04 ] / $1,055.2

Yield to maturity = $63.96 / $1,055.2

Yield to maturity = 0.0606 = 6.06%

Rounded off to whole percentage 6%