Jone Company's bonds currently sell for $1,180 and have a par value of $1,000. They have 8.5% coupon rate and have a 15-year maturity, but they can be called in 6 years at $1,200. What is their yield to maturity (YTM)?
The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100
= [$ 85+ ( $ 1,000- $ 1,180) / 15] /[( $ 1,000+ $1,180)/2] *100
= 73/ 1,090*100
= 6.697247706%
Note : Coupon = Rate * Face Value
= 8.5% * $ 1,000
= $ 85
Since this formula gives an approximate value, the financial calculators can be used alternatively.
where,
Par Value = $ 1,000
Market Price = $ 1,180
Annual rate = 8.5% and
Maturity in Years = 15 Years
Hence the yield to maturity = 6.58%
Hence the correct answer is 6.58%
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