Question

26) Realfast Corporation has just issued a bond that matures in ten years and has a coupon of 4.00% paid semi-annually and face value of $1,000. The bond sells in the market at a price of $1,075.44. What is the bond's yield to maturity?

Multiple Choice

• 4.000 pecent

• 2.000 percent

• 3.116 percent

• -0.341 percent

• 1.558 percent

Answer 1

Face Value = $1,000

Semi-annual Coupon Payment = $1,000*4%*1/2

=$20

Market Price of Bond = $1075.44

n = 10years*2 = 20

Calculating the Yield to maturity using Trial and error Method:-

YTM will be less than the Copon Rate as Inverse Relationship exist between Price and Market Yield.

First taking YTM as 3.5%

Semi-annual YTM = 3.5%/2

= 1.75%

Price = $335.058 + $706.82

Price = $1041.88

As the Price at [email protected]% is closer to Market price of Bond,

Taking another YTM as 3%

Semi-annual YTM = 3%/2

= 1.5%

Price = $343.372 + $742.47

Price = $1085.84

Now Calculating YTM,

YTM = 3.118%

So, YTM of Bond is 3.116% (Differenec due to rounding off decimal)

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