Question

you buy a 8%. 10 year maturity bond for 980. a year later, the bond price is 1200. assume annual coupon payments. what is the new yield to maturity on the bond

Answer 1

Answer:

5.16%

Explanation:

Missing word "(Assume a face value of $1,000 and annual coupon payments."

Current price of the bond = $980

FV = $1000

Coupon rate = 8%

Term = 10 maturity

After 1 year bond price = $1,200

Remaining life = 9 years (10-1)

New yield rate = [Coupon rate+(Maturity value-Current price) / Useful life] / [0.6*Current price + 0.4*Maturity value]

New yield rate = [1,000*8% + (1,000-1,200) / 9] / [0.6*1,200 + 0.4*1,000]

New yield rate = $57.78 / $1,120

New yield rate = 0.0515893

New yield rate = 5.16%