Please solve clearly and explain all steps A 20-year, 8.80% coupon bond sells for $1209.99. If...

Question

Question

Please solve clearly and explain all steps

business finance

Answer 1

Answer #1

Solution:
	Answer is 3rd option The YTM is 6.86%

Working Notes:

	As the bond is paying coupon semi annually , its Ytm can be calculated by Excel or financial calculator

	First we get the semi annual YTM


	No. of period = years to maturity x no. of coupon in a year = 20 x 2 =nper = N = 40
	Face value of bond = FV= $1000
	Price of the bond = PV = 1209.99
	Semi-annual Coupon amount = PMT = coupon rate x face value/2 = 8.80% x $1000 /2= 44

	For calculation YTM by excel
	type above data in below format
	=RATE(N,pmt,PV,FV)
	=RATE(40,44,-1209.99,1000)
	3.4276765%
	=3.4276765%
	6.85535%
	The YTM calculated is semi annual

	YTM annual = Semi annual YTM x 2
	YTM annual = 3.4276765% x 2
	YTM annual = 6.85535%
	YTM annual bond =6.86%

Hence	The YTM is 6.86%

Please feel free to ask if anything about above solution in comment section of the question.

Answer 2

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