Question

Apply the Yield to Maturity (YTM) calculation to the following bond and explain your calculation and how to interpret it. What is the YTM of a bond with a current price of $962 maturing at par value in 7 years with semi-annual dividends and a coupon of 6%?

Answer 1

Par/Face value	1000
Annual Coupon rate	0.06
Annual coupon	60
semi-annual coupon	30
Present Value = Future value/[(1+(r/m))^mt]
r is the yield to maturity
m is the compounding period that is 2
mt is the time period.
price of the bond = sum of present values of future cash flows
price of the bond = 962
Use excel to find r
r/2	0.0334	r	0.0668
mt	1	2	3	4	5	6	7	8	9	10	11	12	13	14
future cash flow	30	30	30	30	30	30	30	30	30	30	30	30	30	1030
present value	29.03039	28.09211	27.18416	26.30555	25.45534	24.63261	23.83648	23.06607	22.32056	21.59915	20.90106	20.22552	19.57182	650.2477
sum of present values	962
The yield to maturity of this bond (YTM) is 6.68%.

Since the bond is selling at a discount the yield to maturity is more than the coupon rate.