Question

1. A bond currently is selling for $1,006. The bond has a $1,000 maturity value and a coupon rate equal to 7 percent, and it matures in eight years. Interest is paid annually. Compute the bond’s yield to maturity today.

Answer 1

Bond price =C*[1-(1+YTM)^-n / YTM] + [P/(1+YTM)^n]
Where,
C= Coupon amount =1000*7% =70
YTM = Yield To maturity
n = Number of periods =8
P= Par value
$1006=70 * [1 - (1 + YTM)^-8 / YTM] + [1000 / (1 + YTM) ^8]
$1006/70= * [1 - (1 + YTM)^-8 / YTM] + [1000 / (1 + YTM) ^8]
$14.3714= * [1 - (1 + YTM)^-8 / YTM] + [1000 / (1 + YTM) ^8]
YTM =6.9%