15-year bonds 2 years ago at a coupon rate of 7.3 percent. The bonds make semiannual payments. If these bonds currently sell for 103 percent of par value, what is the YTM?

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Business

Daisy Austin

2 March, 15:02

15-year bonds 2 years ago at a coupon rate of 7.3 percent. The bonds make semiannual payments. If these bonds currently sell for 103 percent of par value, what is the YTM?

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Phoenix Lynch · Answer 1

The answer is 6.95%

Explanation:

We are looking for Yield-to-maturity (YTM). YTM can also be called rate of return or discount rate.

Note: The 15 - year bond was bought 2 years ago, meaning it remains 13 years

N (Number of periods) = 26 years (13years x 2)

I/Y (Yield to maturity) = ?

PV (present value or market price) = $103

PMT (coupon payment) = $3.65 ([ (7.3percent : 2) x $100) ]

FV (Future value or par value) = $100

We are using a Financial calculator for this.

N = 26; PMT = 3.65; FV = $100; CPT PV = - 103, CPT I/Y

I/Y = 3.47.

3.47% is for semiannual rate

Therefore, annual rate is 6.95% (3.47% x 2)