Question

A bond with a 10% semiannual coupon matures in 6 years. The bond has a price of $1,200. What is the effective yield to maturity for this bond?

Question 5 options:

	5.94%
	6.07%
	7.56%
	12.32%

Answer 1

Face Value of Bond = $1000

Semi-annual Coupon payment = $1000*10%*1/2

= $50

No of years to maturity = 6

n = 6yrs*2 =12

Current Bond Price = $1200

As the price of Bond is higher than the face value of bond, the Yield to maturity(YTM) will be less than the Coupon Rate as Price and YTM have inverse relationship.

Taking YTM as 5%

Semi-annual YTM = 5%/2 = 2.5%

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Price = $ 512.89 + $743.56

Price = $1256.45

As at YTM@5%, Price is closer to Current price. Thus taking another YTM closer at 6%

Semi-annual YTM = 6%/2 =3%

​​​​​​

Price = $ 497.7 + $701.38

Price = $1199.08

Calculating YTM:-

YTM = 5.98%

So, Effective YTM is 5.94 (as YTM is calculated on aprroximate method)

Option A

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