Question

The 7 percent semiannual coupon bonds of Over The Counter, Inc., are selling for $1,102.25. The bonds have a face value of $1,000 and mature in 18 years. What is the yield to maturity

Answer 1

Answer:

YTM = 2.84%

Explanation:

We know,

YTM = $\frac{I + \frac{M - V_{0}}{n} }{\frac{2M + V_{0} }{3}}$

Here,

I = Coupon payment = It is calculated by multiplying the coupon interest rate by the par value of the bond.

M = Bond's par value.

Vo = Bond's current market price.

n = Number of years or periods.

Given,

n = 18

I = Semiannual coupon bonds rate = $1,000*7%*(1/2) = $70 ÷ 2 = $35

M = Par value of a bond = $1,000

Vo = Market value of the bond = $1,102.50

Therefore,

YTM = $\frac{35 + \frac{1,000 - 1,102.25}{18} }{\frac{2*1,000 + 1,102.25}{3}}$

or, YTM = $\frac{35 - 5.68}{\frac{3,102.25}{3}}$

or, YTM = $29.32 ÷ $1,034.08

or, YTM = 0.0284

Therefore, YTM = 2.84%