Question

DDJ just issued an 8-year bond. The bond makes semi-annual coupon payments based on annual coupon rate of 6%. If the bond is trading at $1,125.25, what is the bond’s yield to maturity?

Question 19 options:

	2.07%
	2.01%
	5.14%
	5.97%
	None of the above

Answer 1

Option (e) is correct

None of the above. Yield to maturity is calculated below:

The formula for yield to maturity is:

Yield to maturity = C + F - P /n / F + P / 2

where, C is the coupon payment, F is the face or par value of the bond = $1000, P is the current price of the bond = $1125.25 and n is the no. of years to maturity = 8.

Coupon payments = $1000 * 6% = $60

Putting the values in the above formula, we get,

Yield to maturity = $60 + ($1000 - $1125.25) / 8 / ($1000 + $1125.25) / 2

Yield to maturity = $60 + (-$125.25 / 8) / ($2125.25 /2)

Yield to maturity = $60 - 15.65625 / 1062.625

Yield to maturity = $44.3475 / $1062.625

Yield to maturity = 4.17%