WH Corporation issued bonds on January 1, 2004. The bonds have a coupon rate of 8.0%,...

WH Corporation issued bonds on January 1, 2004. The bonds have a coupon rate of 8.0%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2024. What is the yield to maturity for an SWH Corporation bond on January 1, 2018 if the market price of the bond on that date is $986?

Solutions

Expert Solution

Solution:
	Yield to maturity for an SWH Corporation bond on January 1, 2018	8.30%


Working Notes:

	As the bond is paying coupon semi annually , its Ytm can be calculated by Excel or financial calculator

	First we get the semi annual YTM

	Bond is of January 1, 2004 to January 1,2018 is expired = 14 years AND remaining January 1, 2018 to January 1,2024 = 6 years left

	No. of period = years to maturity x no. of coupon in a year = 6 x 2 =nper = N = 12
	Face value of bond = FV= $1,000
	Price of the bond = PV = -$986

	Semi-annual Coupon amount = PMT = coupon rate x face value/2 =8% x $1,000 /2= $40

	For calculation YTM by excel
	type above data in below format
	=RATE(N,pmt,PV,FV)
	=RATE(12,40,-986,1000)
	4.150478393%
	=4.150478393%

	The YTM calculated is semi annual

	YTM annual = Semi annual YTM x 2
	YTM annual = 4.150478393% x 2
	YTM annual bond =8.30095679%
	YTM annual bond =8.30%

Please feel free to ask if anything about above solution in comment section of the question.

jeff jeffy answered 1 year ago

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