Crossfade Corp. has a bond with a par value of $2,000 that sells for $1,902.14. The bond has a coupon rate of 6.48 percent and matures in 12 years. If the bond makes semiannual coupon payments, what is the YTM of the bond?

yield to maturity = 7.06%

Explanation:

yield to maturity (YTM) is calculated using the following formula:

YTM = {C + [ (FV - PV) / n]} / [ (FV + PV) / 2]

FV = $2,000 PV = $1,902.14 C = $2,000 x 6.48% x 1/2 = $64.80 n = 12 x 2 = 24

YTM = {64.80 + [ (2,000 - 1,902.14) / 24]} / [ (2,000 + 1,902.14) / 2] = (64.80 + 4.0775) / 1,951.07 = 0.0353 or 3.53% semianually or 7.06% annually

Since the bond sells at a discount, its yield to maturity will be higher than the coupon rate.