Question

Suppose that General Electric has a bond issue that has 8 years until maturity. The bond pays a 6.00% annual coupon rate with semi-annual coupons, and has a face value of $1,000. The bond currently trades at $980.00. What is the yield to maturity on this bond? (express as an effective annual rate)

Answer 1

Information provided:

Face value= future value= $1,000

Coupon rate= 6%/2= 3%

Coupon payment= 0.03*1,000= $30

Time= 8 years*2= 16 semi-annual periods

Current price= present value= $980

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PMT= 30

N= 16

PV= -980

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 3.1612.

Therefore, the yield to maturity is 3.1612*2= 6.3224% 6.32%.

Effective annual rate is calculated using the below formula:

EAR= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

EAR= (1+0.0632/2)^2-1

        = 1.0642 – 1

        = 0.0642*100

        = 6.4199%   6.42%.

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