Question

The Kittle Company’s 30-year, $1,000 par-value bonds currently sell for $1,125.50. Assuming interest is paid annually and the bond’s coupon rate is 10%, what is the bond’s yield-to-maturity?

Answer 1

Answer:

Estimated YTM = 9.016%

YTM = 8.81%

Explanation:

YTM is total return that is expected from a bond if it is hold until maturity. It is a long term bond yield rate but expressed as annual rate. Formula to calculate the YTM is as follow:

Yield to maturity = [ C + ( F - P ) / n ] / [ ( F + P ) / 2 ]

C=  Coupon payment = $1,000 x 10% = $100

F = Face Value = $1,000

P = price of bond = $1,125.50

n = number of years = 30 years

Yield to maturity = [ $100 + ( $1,000 - $1,125.50 ) / 30 ] / [ ( $1,000 + $1,125.50 ) / 2 ]

Yield to maturity = [ $100 + ( - 125.50 ) / 30 ] / [ $2,125.50  / 2 ]

Yield to maturity = [ $100 - 4.18 ] / $1,062.75

Yield to maturity = $95.82 / $1,062.75

Yield to maturity = 0.09016 = 9.016% (Estimated)

Actual YTM = 8.81%