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Chapter 4: Q.2 (page 114)

What is the formula used to calculate the yield to maturity on a 20-year coupon bond with a current yield of 12% and \(1,000 face value that sells for \)2,500

Short Answer

Expert verified

The yield to maturity is 3.33%

Step by step solution

01

Step 1. Introduction

A coupon is a payment of interest received by a bondholder from the date of issuance to the bond's maturity date. The "coupon rate," which is computed by summing the total number of coupons paid each year and dividing it by the bond's face value, is the most common way of describing coupons.

02

Step 2. Explanation

CouponAmount=CouponRate×FaceValue=10%×1000=100YieldtoMaturity=Couponamount+((Facevalue-sellingprice)/n)(Facevalue+sellingprice)/2=100+((1000-2000)/20)(1000+2000)/2=100+(-1000/20)(3000/2)=100-501500=501500=3.33%

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Most popular questions from this chapter

Do bondholders fare better when the yield to maturity increases or when it decreases? Why?

Consider a coupon bond that has a \(900 par value and a coupon rate of 6%. The bond is currently selling for \)860.15 and has two years to maturity. What is the bond’s yield to maturity?

Would $200, which is to be received in exactly one year, be worth more to you today when the interest rate is 12% or when it is 17%?

Retired persons often have much of their wealth placed in savings accounts and other interest-bearing investments and complain whenever interest rates are low. Do they have a valid complaint?

To help pay for college, you have just taken out a \(1,000 government loan that makes you pay \)126 per year for 25 years. However, you don’t have to start making these payments until you graduate from college two years from now. Why is the yield to maturity necessarily less than 12%? (This is the yield to maturity on a normal \(1,000 fixed-payment loan on which you pay \)126 per year for 25 years.)
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