Question

West Corp. issued 10-year bonds two years ago at a coupon rate of 8.1 percent. The bonds make semiannual payments. If these bonds currently sell for 102 percent of par value, what is the YTM? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) 

YTM = _______ %

Answer 1

The formula for yield to maturity is:

Yield to maturity = C + F - P /n / F + P / 2

where, C is the coupon payment, F is the face or par value of the bond, P is the current price of the bond and n is the no. of years to maturity.

Suppose the bonds have $100 face value.

then, current price (P) = $102

and n = 10

Annual coupon payments = $100 * 8.1% = $8.1

Putting the values in the above formula, we get,

Yield to maturity = $8.1 + ($100 - $102) / 10 / ($100 + $102) / 2

Yield to maturity = $8.1 + (-$2 / 10) / ($202 /2)

Yield to maturity = $8.1 - 0.2 / $101

Yield to maturity = $7.9 / $101

Yield to maturity = 7.81%