Question

Signature Sweets, Inc. has 8 percent semiannual bonds outstanding with 15 years to maturity. The latest quote on these bonds is 109.16 percent of the face value. What is the yield to maturity

Answer 1

Answer:

Yield to maturity is 7% annually

and 3.5% semiannually  

Explanation:

If a bond is held until maturity, the total return expected from the bond until maturity is known as Yield to maturity. It is considered as long term and expressed in annual term.

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

Where

C = Coupon payment = 100 x 8% = 8 annually = 4 semiannually

F = Face value = $100

P = Price of bond = $109.16

n = number of periods = 2 per year x 15 year = 30 periods

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

Yield to maturity = [ 4 + ( ( $100 - 109.16 ) / 30 ) ] / [ ( 100 + 109.16 ) / 2 ]

Yield to maturity = 3.69 / 104.58

Yield to maturity = 0.0353 = 3.53% = 3.5% semiannually ( rounded off to 1 decimal place) = 7% annually