Question

Chevron Corporation bonds have 6 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 10%.

a) What is the yield to maturity (YTM) at a current market price of (1) $865 and (2) $1,166.

b) Would you pay $865 for each bond if you thought that a "fair" market interest rate for such bonds was 12%?

Answer 1

a) YTM

1) At 865

=RATE(6,10%*1000,-865,1000)

=13.42%

2) 1166

=RATE(6,10%*1000,-1166,1000)

=6.56%

b) Yes, as long as YTM is greater than the required rate.