Question

Acme Products has a bond issue outstanding with 8 years remaining to maturity, a coupon rate of 10% with interest paid annually, and a par value of $1,000. If the current market price of the bond issue is $814.45, what is the yield to maturity, rd

Answer 1

Answer:

14%

Explanation:

Using the equation,

1. c(1 + r)/1 + c(1 + r)/2 + . . . + c(1 + r)/Y + B(1 + r)/Y = P

where

c is annual coupon payment (in dollars, not a percent)

So c = 10% of $1000

=$100

Y is number of years to maturity = 8

B is par value =$1000

P is purchase price $814.45

r is yield to maturity, rd

Therefore substitute the values

100(1+r)/1 + 100(1+r)/2 + 100(1+r)/3 + 100(1+r)/4 + 100(1+r)/5 + 100(1+r)/6 + 100(1+r)/7 + 100(1+r)/8 + 1000(1+r)/8 = 814.45

yield to maturity, rd =14.00%