Question

A 1,000 par value bond with a 9.00% coupon rate​ (semianual interest) matures in 5 years and currently sells for $ 992.46

What is the​ bond's yield to maturity and bond equivalent​ yield?

The​ bond's yield to maturity is

Answer 1

Formula for yield to maturity is as follows -

YTM      = [Coupon + ((Face value – Market price)/ No. of years) / [(Face value + Market price) / 2]

As coupon rate is 9% and coupon is paid semi-annually

Therefore coupon = $45 and No. of years = 10 (5 years x 2)

              = [45 + ((1000 – 992.46)/ 10)] / [(1000+992.46)/2]

              = 45.754 / 996.23

              = 0.04592

= i.e. 4.592% semi annual or 9.184%

You will get the same answer if you consider annual coupon of $ 90 and no. of years as 5.

Bond equivalent yield cannot be found out unless complete duration of the bond is not known.