The Petit Chef Co. has 7 percent coupon bonds on the market with 9 years left to maturity. The bonds make annual payments and have a par value of $1,000. If the bonds currently sell for $1,038.50, what is the YTM?

The YTM is 6.45%

Explanation:

Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity.

Face value = F = $1,000

Coupon payment = $1,000 x 7% = $70

Selling price = P = $1,038.50

Number of payment = n = 9 years

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

Yield to maturity = [ $70 + ($1,000 - $1,038.5) / 9 ] / [ (1,000 + $1,038.5) / 2 ]

Yield to maturity = [ $70 - $4.28 ] / $1,019.25 = $65.72 / $1,019.25 = 0.0645 = 6.45%