Question

In: Finance

Russell Industries issued an 8% annual coupon bond that matures in 20 years.The bond has a...

Russell Industries issued an 8% annual coupon bond that matures in 20 years.The bond has a face value of $1,000 and a current yield of 8.2430%. What is the bond's yield to maturity?

Please show formulas and work when solving with a financial calculator, not excel.

Answer: 8.31%

Solutions

Expert Solution

Information provided:

Face value= future value= $1,000

Time= 20 years

Coupon rate= 8%

Coupon payment= 0.08*1,000= $80

Current yield= 8.2430%

The question is solved by first calculating the current price of the bond.

Current yield is calculated using the below formula:

Current Yield= Annual interest/Current price

0.082430= $80/ Current price

Current price= $80*/ 0.082430

                          = $970.52.

Therefore, the price of the bond is $$970.52.

The yield to maturity is computed by entering the below in a financial calculator:

FV= 1,000

PV= $970.52.

N= 20

PMT= 80

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 8.3072%

Therefore, the yield to maturity is 8.3072%   8.31%.

In case of any query, kindly comment on the solution.

jeff jeffy answered 10 months ago
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