Question

PP Inc. has outstanding bonds with an annual 8% coupon. The bonds have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is the yield to maturity on the bonds?

Answer 1

The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

= [$ 80+ ( $ 1,000- $ 865) / 11] /[( $ 1,000+ $ 865)/2] *100

= 92.27272727/932.5*100

= 9.895%

Note : Coupon = Rate * Face Value

= 8% * $ 1,000

= $ 80

Since this formula gives an approximate value, The financial calculators can be used alternatively.

where,

Par Value = $ 1,000

Market Price = $  865

Annual rate = 8% and

Payments = 1

Maturity in Years = 11 Years

Hence the yield to maturity = 10.09%

Answer = 10.09%