Question

Yield to Maturity and Required Returns The Brownstone Corporation's bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. What is the yield to maturity at a current market price of $799? Round your answer to two decimal places. % What is the yield to maturity at a current market price of $1,067? Round your answer to two decimal places.

Answer 1

The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

= [$ 80 + ( $ 1,000- $ 799) / 5] /[( $ 1,000+ $799)/2] *100

= 120.2 / 899.50*100

= 13.36297943%

Note : Coupon = Rate * Face Value

= 8% * $ 1,000

= $ 80

Since this formula gives an approximate value, the financial calculators can be used alternatively.

where,

Par Value = $ 1,000

Market Price = $ 799

Annual rate = 8% and

Maturity in Years = 5 Years

Hence the yield to maturity =13.83%

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The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

= [$ 80 + ( $ 1,000- $ 1067 ) / 5] /[( $ 1,000+ $ 1067)/2] *100

= 66.6 / 1033.5*100

= 6.444121916%

Note : Coupon = Rate * Face Value

= 8% * $ 1,000

= $ 80

Since this formula gives an approximate value, the financial calculators can be used alternatively.

where,

Par Value = $ 1,000

Market Price = $ 1,067

Annual rate = 8% and

Maturity in Years = 5 Years

Hence the yield to maturity = 6.39 %