Question

I don't if this formula that I'm using is correct: PW = -875+ 20(P/A, i, 24) + 1000 (P/F, i , 24), where the payments are A= (0.04/2)*(1000)=20 (see the formula. Im looking the rate of return by iteration but I'm not getting a good result. Please someone help me to find my problem.

7.29 A man buys a corporate bond from a bond brokerage house for $875. The bond has a face value of $1000 and a 4% coupon rate paid semiannually. If the bond will be paid off at the end of 12 years, what rate of return will the man receive?

Answer 1

Solution:-

Semi-annual coupon rate = 4% / 2 = 2% or 0.02

Semi-annual coupon amount = $1,000 * 0.02 = $20

n = 12 * 2 = 24

Semi-annual YTM = $20 + [($1,000 - $875) / 24] / [($1,000 + $875) / 2]   

                                   = $20 + 5.2083 / 937.50     

                              = 25.2083 / 937.50

                              = 0.02688

YTM = (1 + 0.02688)² - 1 = 0.0544    or 5.44%

Thus, rate of return will the man receive is 5.44%