Step by step without financial calculator functions: Your firm has just issued a 20-year $1,000.00 par...

Step by step without financial calculator functions:

Your firm has just issued a 20-year $1,000.00 par value, 10% annual coupon bond for a net price of $964.00. What is the yield to maturity? Don't use a financial calculator to determine your answer.

A) 10.60%

B) 11.10%

C) 10.44%

D) 10.16%

Expert Solution

Face value=    1000
time (n) annual periods =   20
Bond actual price =   964
annual Coupon = 1000*10%=   100
Bond price formula = Coupon amount * (1 - (1/(1+r)^n)/r + face value/(1+r)^n
r is that rate where price is Equal to Current price $964

Assume r= 10%, Bond price=
100*(1-(1/(1+10%)^20))/10%+ 1000/(1+10%)^20
1000

Assume r= 11%, Bond price =
100*(1-(1/(1+11%)^20))/11%+ 1000/(1+11%)^20
920.3667188
Bond price is in between Two prices calculated by two rates. So yield to Maturity is in between 2 rates.
interpolation formula for calculating exact rate = lower rate + (uper rate - lower rate)*(Uper price - bond actual price)/(uper price - lower price)
10% + ((11%-10%)*(1000-964)/(1000-920.3667188))
10.44%

So yield to Maturity is   10.44%

Answer is C

jeff jeffy answered 2 days ago

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