Question

In 2000 Dr. Pepper Inc. issued bonds with an 8 percent coupon rate and a $1,000 face value. The bonds mature on March 1, 2025. If an investor purchased one of these bonds on March 1, 2012, determine the yield to maturity if the investor paid $1,100 for the bond

a.) 6.8%

b.) The yield to maturity must be greater than 8% because the price paid for the bond exceeds the face value.

c.) 5.4%

d.) The yield to maturity is $900 ($1,000 interest less $100 capital loss).

Answer 1

a.) 6.8%

Yield To Maturity(YTM) = (interest per period+ ((Redemption price - Current market price) / life remaining to maturity)) / ((.4*Redemption price)+ (.6*Current market price))

= ((1000*8%)+ ((1000-1100)/13)) / ((.4*1000)+ (.6*1100))

= (80-7.69230769231) / 1060

= 0.06821480406

= 6.8%