Question

 The market price is ​$700 for a 14​-year bond ​($1,000 par​ value) that pays 11 percent annual​ interest, but makes interest payments on a semiannual basis ​(5.5 percent​ semiannually). What is the​ bond's yield to​ maturity?

Answer 1

Yield to Maturity= Coupon Interest +(Maturity value - Market Price) / Number of years/periods until maturity {(Maturity value*0.4) + (Market Price*0.6)} Yield to Maturity= ($1,000*5.5%)+ {($1,000-$700)/28? {($1,000*0.4) + ($700*0.6)} Yield to Maturity= - $55+$10.71 D $820 Yield to Maturity= 365.71 $820 Yield to Maturity = 8.10% per period or 16.20% per annum Hence Yield to Maturity is 16.20% Note: Annual interest rate on bond is 11%, so semi-annual interest rate is 5.50%per period Term of the bond is 14 years or 28 semi-annual periods Since interest is paid on semiannual basis above computations are made on semiannual basis