ABC Company issues a 3-year bond with a $1,000 Face Value and a 5% Coupon Rate, with coupons paid once a year at the end of ever

Question

3 years ago

7

ABC Company issues a 3-year bond with a $1,000 Face Value and a 5% Coupon Rate, with coupons paid once a year at the end of ever

y year. It is now the beginning of its second year and the first coupon has already been paid. Banks are now giving 4% interest for deposits. The Bond's Market Value is $913. What is the bond's yield to maturity?

Business

1 answer:

AlekseyPX · Answer 1 · 2022-05-18T09:57:25+03:00

Answer:

yield to maturity = 9.78%

Explanation:

yield to maturity = {coupon + [(face value - market value) / n]} / [(face value + market value) / n]]

YTM = {$50 + [($1,000 - $913) / 2]} / [(($1,000 + $913) / 2]] = $93.50 / $956.50 = 0.09775 = 9.78%

The yield to maturity represents the total rate of return that an investor should receive if he/she holds a bond until it matures.