Question

The bond of Gum Inc. has a 4 percent coupon and pay interest annually. Currently, the bond price is quoted as 95% of its face value. The bonds mature in 6 years. What is the yield to maturity? 6.81 percent 5.22 percent 4.98 percent 3.74 percent

Answer 1

Face Value = $1000

Annual Coupon Payment= $1000*4%

= $40

Price of bond = 95% of face Value

= $1000*95%

= $950

Maturity(n) = 6 years

As the Price is less than the Face Value, the Yield to matirity will be higher than the Coupon rate as Price and Yield have inverse relationship.

Calculating YTM of the bond:

Taking YTM above coupon rate at 5%

Price = $ 203.028 + $746.215

Price = $ 949.243

Now, since at YTM at 5% is closer to lower than the market price, taking another YTM at 4.5%

Price = $ 206.316 + $767.90

Price = $ 974.216

Now, calculating YTM:

YTM = 4.98%

So, Yield to maturity is 4.98%

If you need any clarification, you can ask in comments.

If you like my answer, then please up-vote as it will be motivating