Question

The Pioneer Petroleum Corporation has a bond outstanding with an $70 annual interest payment, a market price of $890, and a maturity date in five years. Assume the par value of the bond is $1,000.  
    
Find the following: (Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
  

	a. Coupon rate % b. Current yield % c-1. Approximate yield to maturity % c-2. Exact yield to maturity %

Answer 1

a). Coupon Rate = Annual Coupon Payment / Par Value of the bond = $70 / $1000 = 0.07, or 7%

b). Current Yield = Annual Coupon Payment / Market Price of the bond

= $70 / $890 = 0.0787, or 7.87%

c-1). Approximate YTM = [Coupon Payment + {(Face Value - Market Price) / n}] / [(Face Value + Market Price) / 2]

= [$70 + {($1000 - $890) / 5}] / [($1000 + $890) / 2]

= [$70 + $22] / [$1890 / 2] = $92 / $945 = 0.0974, or 9.74%

c-2). To find the exact YTM, we need to put the following values in the financial calculator:

N = 5;

PV = -890;

PMT = 70;

FV = 1000;

Press CPT, then I/Y, which gives us 9.89

So, YTM = 9.89%