Section 3.6: Measuring Interest Rates and Asset Prices Suppose you see a $1,000 face value bond with a yearly coupon payment of $80 that is maturing in 3 years and is currently selling for the price of $1,040.
1. Referring to situation 3.6, is the yield to maturity above, below, or equal to 8.0 percent? Why?
Face value = $1,000
Market price = $1,040
Coupon payment = $80
Calculate the Yield to Maturity
YTM = [C + (FP - MP)/2]/[(FP+MP)/2]
YTM = [80 + (1,000 - 1,040)/2]/[(1,000 + 1,040)/2]
YTM = [80 - 20]/1,020
YTM = 60/1,020 = 5.88
Thus,
The Yield to Maturity is 5.88%.
The yield to maturity is below 8 percent.
Section 3.6: Measuring Interest Rates and Asset Prices Suppose you see a $1,000 face value bond...