Answer:
Yield to Maturity (YTM) is 7.94 %.
Explanation:
Yield to Maturity (YTM) refers to internal rate of return that bond holder will earn if he purchased the bond today at the current market price and held it till maturity of the bond.
Yield to Maturity of the the bond = [Coupon payment+ (Future value of bond - Present value of bond / no. of Periods)] / [(Future value of bond + Present value of bond)/2] ---- (a)
Bond maturity period = 20 years
Coupon rate = 8.3 %
Par Value = 1000
No. of periods = 2 x 20 = 40 (semi- annual)
Coupon payment = 8.3 % x 1000 = 83 = 83/2 = 41.5 (Semi-annual)
Present value of bond = 104 percent of Par value = 104
Future value of bond = 1000
YTM = ?
Putting the values in equation (a),
Semi annual YTM = [41.5 + (1000-1040 / 40)] / [(1000 + 1040)/2]
Semi annual YTM = [41.5 + (-40/40) ] / [(1040)/2]
Semi annual YTM= [41.5 - 1] / 1020
Semi annualv YTM = 40.5 / 1020 = 0.0397
Hence, Annual yield to maturity = 0.0397 x 2 = 0.0794 or 7.94 %.
