Question

Problem 5-3 Bond Yields Skolits Corp. issued 10-year bonds 2 years ago at a coupon rate of 8.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) YTM %

Answer 1

Given the following information,

Coupon rate = 8.4% = 0.084

Par value = Face value = 1000

Number of years to maturity = 10 - 2 = 8 years (Since this bond was issued two years ago)

Number of compounding periods in a year = semi annually = 2

So, the number of compounding periods till maturity NPER = 8*2 = 16

Bond price = 105%*1000 = PV = 1050

Interest rate period = face value*coupon rate/ number of compounding periods

Interest rate period PMT = 1000*0.084/ 2 = 84/2 = 42

Solving for bond's yield to maturity in excel, using the formula

=RATE(nper,pmt,-pv,fv)*2

The rate is multiplied with 2 since the above calculations are done on semi annual basis and the YTM has be calculated for yearly basis.

Thus, the YTM is 7.56%