Question

A $1,000 par, 6& coupon bond with 8 years to maturity is currently priced at $1,150.00. What is the approximate yield to maturity?

a. 4.01%

b. 3.88%

c. 3.79%

d. 3.52%

Answer 1

YTM :
YTM is the rate at which PV of Cash inflows are equal to Bond price when the bond is held till maturity.

YTM = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in disc rate ] * 1%

Year	Cash Flow	PVF/[email protected]	PV of Cash Flows	PVF/[email protected]	PV of Cash Flows
1-8	$                  60.00	7.0197	$                        421.18	6.7327	$                     403.96
8	$             1,000.00	0.7894	$                        789.41	0.7307	$                     730.69
PV of Cash Inflows	$                    1,210.59		$                 1,134.65
PV of Cash Oiutflows	$                    1,150.00		$                 1,150.00
NPV	$                          60.59		$                     -15.35

YTM = Rate at which least +ve NPV + [ NPV at that rate / Change in NPV due to Inc of 1% in Int Rate ] * 1%

= 0.03 + [60.59 / 75.94 ] * 1%

= 0.03 + [0.79 ] * 1%

= 0.03 + [0.0079]

= 0.0379

Option C is correct.

Pls do rate, if the answer is correct and comment, if any further assistance is required.