Question

You are purchasing a bond that currently sold for $985.63. it has the time-to-maturity of 10 years and a coupon rate of 6%, paid semi-annually. The bond can be called for $1,020 in 3 years. What is the yield to maturity of this bond?

Answer 1

Answer:

YTM = 3.094%

Explanation:

If you can't calculate the YTM using excel or a financial calcualtor, you can do it by hand using the approximation formula:

$YTM = \frac{C + \frac{F-P}{n }}{\frac{F+P}{2}}$

C = interest payment = 1,000 x 6%/2 = 30

F = face value = 1,000

P = 985,63

n = payment periods = 10 years x 2 payment per year

$YTM = \frac{30+ \frac{1000-958.63}{20 }}{\frac{1000+958.63}{2}}$

YTM = 3.094%

Notice, this YTM is an approximation