Question

A

9-year

bond pays interest of

$26.90

​semiannually, has a face value of

$1,000​,

and is selling for

$ 795.07.

What are its annual coupon rate and yield to​ maturity

Answer 1

Information provided:

Face value= future value= $1,000

Time= 9 years*2= 18 semi-annual periods

Semi-annual interest= $26.90

Current price= present value= $795.07

The coupon rate is computed using the below formula:

Coupon rate= Annual coupon payment/ Face value

                      = $26.90*2/ $1,000

                      = $53.80/ $1,000

                      = 0.0538*100

                       = 5.38%.

Yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

N= 18

PMT= 26.90

PV= -795.07

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 4.3560.

Therefore, the yield to maturity is 4.3560%*= 8.7120% 8.71%.

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