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21 August, 08:10

Parkway Void Co. issued 15-year bonds two years ago at a coupon rate of 5.4 percent. The bonds make semiannual payments. If these bonds currently sell for 106 percent of par value, what is the YTM

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  1. 21 August, 09:00
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    YTM = 4.795%

    Explanation:

    The formula for yield to maturity (YTM) is given as follows.

    YTM = [C + (F - P) / N) / [ (F + P) / 2] where

    C = Coupon payment

    F = Face value of bond

    P = Price of bond

    N = Time to maturity

    In the given scenario, note that the payments are semi-annual. Therefore:

    C = 2.7% x 1000 = $27

    F = $1000

    P = 106% x $1000 = $1060

    N = (15 - 2) x 2 = 26

    YTM = [$27 + ($1000 - $1060) / 26] / [ ($1000 + $1060) / 2]

    = $24.692 / $1030

    = 2.3973%

    In yearly terms, YTM = 2.3973% x 2

    = 4.795%
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