Question

Suppose the following bond quotes for IOU Corporation appear in the financial page of today�s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2015.

a.	What is the yield to maturity of the bond? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	What is the current yield?

copany (Ticker)	Coupon	Maturity	Last Price	Last Yield	ESt Vol (000s)
IOU	7.00	April 15, 2035	92.792	??	79

Answer 1

Yield to maturity (YTM) of the Bond

• The Yield to maturity (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
• The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
• The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$2,000]	FV	2,000
Coupon Amount [$2,000 x 7.00%]	PMT	140
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [Apr 15, 2015 to Apr 15, 2035]	N	20
Bond Price/Current Market Price of the Bond [-$2,000 x 92.792%]	PV	-1,855.84

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the annual yield to maturity on the bond (1/Y) = 7.71%.

“Hence, the Yield to Maturity [YTM] of the Bond will be 7.71%”