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8 May, 12:51

The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $1,032. What is the yield to maturity

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  1. 8 May, 15:53
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    Answer: 6.5%

    The yield to maturity is 6.496% (approximated to 6.5% to nearest tenth)

    Explanation:

    Using the formula (semi annually YTM)

    YTM = C + (fv - pv) / t : (fv + pv) / 2

    C = coupon rate = 7% (1000) = $70

    fv = face value = $1,000

    pv = price value = $1,032

    t = Time to maturity in years = 8years

    C + (fv - pv) / t = 70 + (1000-1032) / 8

    = 70 - (32 / 8) = 66

    (fv + pv) / 2 = (1000 + 1032) / 2

    = 2032 / 2

    = 1016

    YTM = 66 / 1016

    YTM = 0.06496

    In % = (6496 / 100,000) * 100

    = 6.496%

    Approximately ... 6.5%
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