Question

Rogue Recovery Inc. wishes to issue new bonds but is uncertain how the market would set the yield to maturity. The bonds would be 20-​year, ​7% annual coupon bonds with a​ $1,000 par value. The firm has determined that these bonds would sell for​ $1,050 each. What is the yield to maturity for these​ bonds?
(A) 7.35%
(B) 6.55%
(C) 6.54%
(D) 7.00%

Answer 1

Answer:

yield to maturity = 6.545%

correct option is (C) 6.54%

Explanation:

given data

face value = $1,000 par value

coupon rate = 7 %

time = 20 year

price PV = $1,050

to find out

yield to maturity for these​ bonds

solution

we will apply here yield to maturity formula that is express as

yield to maturity = $\frac{C +\frac{F-P}{t}}{\frac{F+P}{2}}$      ................1

here F is face value and C is annual coupon payment and P is price

so here C is = face value × coupon rate

C = 1000  × 70 % = 70

so put all value in equation 1 we get

yield to maturity = $\frac{70 +\frac{1000-1050}{20}}{\frac{1000+1050}{2}}$  

yield to maturity = 6.545%

correct option is (C) 6.54%