Question

The Bonsai Nursery Corporation has $1,000 par value bonds with a coupon rate of 8% per year making semiannual coupon payments. If there are twelve years remaining prior to maturity and these bonds are selling for $876.40, what is the yield to maturity for these bonds?

Answer 1

Answer:

9.78%

Explanation:

The yield to maturity can be determined using the rate formula in excel as shown below:

=rate(nper,pmt,-pv,fv)

nper is number of times coupon interest would be paid,which is 12 years multiplied by 2(semi-annual interest payment) i.e 24

pmt is the semi-annual interest which is $1000*8%/2=$40

pv is the current price of the bond at $876.40

fv is the face value of the bond which is $1000

=rate(24,40,-876.40,1000)=4.89%

Semi-annual yield is 4.89%

Annual yield is 4.89%*2=9.78%

The yield to maturity on these bonds is approximately 9.78%