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8 September, 22:36

Rogue Racing Inc. has $1,000 par value bonds with a coupon rate of 8% per year making semiannual coupon payments. If there are twelve years remaining prior to maturity and these bonds are selling for $876.40, what is the yield to maturity for these bonds

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  1. 9 September, 01:07
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    Yield to maturity is 4.8%

    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

    Assuming Coupon payments are made annually

    Coupon payment = $1,000 x 8% / 2 = $40

    Selling price = P = $876.40

    Number of periods = n = 12 years x 2 = 24

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

    Yield to maturity = [ $40 + (1000 - $876.40) / 24 ] / [ (1,000 + $876.40) / 2 ]

    Yield to maturity = [ $40 + 5.15 ] / $938.2 = $45.15 / $938.2 = 0.048 = 4.8%
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