Question

"Bond Yields [LO2] West Corp. issued 25-year bonds two years ago at a coupon rate of 5.3 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?"

Answer 1

YTM is the Rate at which PV of Cash Inflows are equal to Bind Price.

Period	CF	PVF @2%	Disc CF	PVF @2.5%	Disc CF
0	$ -1,050.00	1.0000	$ -1,050.00	1.0000	$ -1,050.00
1-46	$         26.50	29.8923	$       792.15	27.1542	$       719.59
46	$    1,000.00	0.4022	$       402.20	0.3212	$       321.20
NPV			$       144.35		$          -9.21

YTM per 6 Months = Rate at which least +ve NPV + [ NPV at that rate / Change in NPV due to 0.5% inc in disc Rate ] * 0.5%

= 2% + [ 144.35 / 153.56 ] * 0.5%

= 2% + ( 0.94 * 0.5%)

= 2% + 0.47%

= 2.47%

YTM per anum = YTM per 6 Months * 2

= 2.47% * 2

= 4.94%