You would like to purchase a bond, you find one listed at 85.25, with an annual...

You would like to purchase a bond, you find one listed at 85.25, with an annual coupon rate of 6.5%, that matures in 8 years. Find the annual yield to maturity.
1. If your required rate of return is 10% would you purchase this bond? Why or why not?

Solutions

Expert Solution

Current Price = 85.25

Coupon 6.5%

Maturity = 8 years

SInce the Current Price of Bond < Par Value, the TYM will be less than Coupon.

Let's assume the YTM be 9%

Value of Bond =

= 86.1629522125

Now,

Let's assume the YTM be 10%

Value of Bond =

= 81.3277583066

YTM =

= 9% + ((86.1629522125 - 85.25) / (86.1629522125 - 85.25) + (85.25 - 81.3277583066 )) * (10-9)

= 9% + (0.9129522125 / (0.9129522125) + (3.9222416934)) * 1

= 9% + (0.9129522125 / 4.8351939059) * 1

= 9% + 0.18881398145

= 9.19%

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jeff jeffy answered 1 year ago

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