Question

7. Paccione Corporation has a bond issue outstanding with 9 years to maturity, a coupon rate of 7.5 percent, and a $1,000 face value. The bonds pay coupons semi-annually. The bonds sell for $1,140.

What is the yield to maturity on the bonds?

Answer 1

Compute the semi-annual interest, using the equation as shown below:

Semi-annual interest = Face value*Rate of interest/2

                                  = $1,000*7.5%/2

                                  = $37.50

Hence, the semi-annual interest is $37.50.

Compute the semi-annual yield to maturity (YTM), using the equation as shown below:

Semi-annual YTM = [Semi-annual interest + {(Redemption value – Net proceeds)/ Maturity period}]/ {(Redemption value + Net proceeds)/ 2}

                                = [$37.50 + {($1,000 – $1,140)/ 18}]/ {($1,000 + $1,140)/ 2}

                                = ($37.50 - $7.77777777777)/ $1,070

                                = 2.77777777%

Hence, the semi-annual YTM is 2.77777777%.

Compute the yield to maturity (YTM), using the equation as shown below:

YTM = Semi-annual YTM*2

          = 2.77777777%*2

          = 5.555555554%

Hence, the YTM is 5.555555554%.