Solution: | ||||
Answer is 3rd option The YTM is 6.86% | ||||
Working Notes: | ||||
As the bond is paying coupon semi annually , its Ytm can be calculated by Excel or financial calculator | ||||
First we get the semi annual YTM | ||||
No. of period = years to maturity x no. of coupon in a year = 20 x 2 =nper = N = 40 | ||||
Face value of bond = FV= $1000 | ||||
Price of the bond = PV = 1209.99 | ||||
Semi-annual Coupon amount = PMT = coupon rate x face value/2 = 8.80% x $1000 /2= 44 | ||||
For calculation YTM by excel | ||||
type above data in below format | ||||
=RATE(N,pmt,PV,FV) | ||||
=RATE(40,44,-1209.99,1000) | ||||
3.4276765% | ||||
=3.4276765% | ||||
6.85535% | ||||
The YTM calculated is semi annual | ||||
YTM annual = Semi annual YTM x 2 | ||||
YTM annual = 3.4276765% x 2 | ||||
YTM annual = 6.85535% | ||||
YTM annual bond =6.86% | ||||
Hence | The YTM is 6.86% | |||
Please feel free to ask if anything about above solution in comment section of the question. | ||||
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