A firm's bonds have a maturity of 10 years with a $1,000 face value, a 9 percent semiannual coupon, are callable in 5 years at $1,050, and currently sell at a price of $1,080. What is their yield to maturity

Yield to maturity is 3.94%

Explanation:

Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity.

Face value = F = $1,000

Coupon payment = $1,000 x 9% = $90/2 = $45 semiannually

Selling price = P = $1080

Number of payment = n = 10 years x 2 = 20

Yield to maturity = [ C + (F - P) / n ] / [ (F + P) / 2 ]

Yield to maturity = [ $45 + (1000 - 1080) / 20 ] / [ (1,000 + 1080) / 2 ]

Yield to maturity = [ $45 - 4 ] / 1040 = $41 / 1040 = 0.394 = 3.94%