Question

Parkway Void Co. issued 15-year bonds two years ago at a coupon rate of 9.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?

Answer 1

Answer:

4.42% semiannually OR 8.84% annually

Explanation:

The actual return that an investor earn on a bond until its maturity is called the Yield to maturity. It is a long term return which is expressed in annual rate.

According to given data

Assuming the Face value of the Bond is $1,000

Coupon Payment = C = $1,000 x 9.4% = $94 annually = $47 semiannually

Price of the Bond = P = $1,000 x 105% = $1,050

Numbers of period = n = 15 years x 2 = 30 periods

Use Following Formula to calculate YTM

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

Yield to maturity = [ $47 + ( $1,000 - $1,050 ) / 30 ] / [ ($1,000 + $1,050 ) / 2 ]

Yield to maturity = $45.33 / $1,025 = 0.0442

Yield to maturity = 4.42% semiannually OR 8.84% annually