A $1,000 par value 10-year bond maturing at par with 8% semiannual coupons is selling for...

A $1,000 par value 10-year bond maturing at par with 8% semiannual coupons is selling for $900 Find the nominal yield rate convertible semiannually, using the "Premium/Discount formula".

(NOTE: The premium/discount formula is: P = C + (Fr - Ci)a_n]iwhere P = price, C = redemption value, F = par value, i = yield rate (yield to maturity)

Expert Solution

Yield to maturity (YTM) of the Bond

The Yield to maturity (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)


Variables	Financial Calculator Keys	Figure

Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 8.00% x ½]	PMT	40
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [10 Years x 2]	N	20
Bond Price/Current Market Price of the Bond [-$900]	PV	-900

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the semi-annual yield to maturity on the bond (1/Y) = 4.79%

The semi-annual Yield to maturity = 4.79%

Therefore, the annual Yield to Maturity of the Bond = 9.58% [4.79% x 2]

“Hence, the nominal Yield to maturity (YTM) of the Bond will be 9.58%”

jeff jeffy answered 1 week ago

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