Question

Heginbotham Corp. issued 10-year bonds two years ago at a coupon rate of 7.2 percent. The bonds make semiannual payments. If these bonds currently sell for 102 percent of par value, what is the YTM? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

3.46% semi-annually

6.92% annually

Explanation:

The yield to maturity is actual return on a bond investment, which is computed using the rate formula in excel:

=rate(nper,pmt,-pv,fv)

nper is the number of times the bond pays coupon interest, in this case it is number of years to maturity multiplied by 2 i.e (10*2=20)

pmt is the periodic semi-annual coupon payable by the bond which is 7.2%/2*$100=$3.6

pv is the bond current price $100*102%=$102

fv is the redemption value of $100

=rate(20,3.6,-102,100)

rate=3.46%  semi-annually

but 3.46% *2=6.92%  annually

Answer 2

Answer:

YTM = 6.88%

Explanation:

Given Cr =7.2%, n = 10, P =102% par value

Assume a par value of $1000 , YTM = ?

Semiannual coupon payments

C = 7.2%*1000/2 = $36

n = The bonds were issued 2 years ago meaning they now have 8 to maturity

  8*2 = 16 years

P = 102 percent of par

     102%*1000 =$1020

YTM = C+F-P÷n / F+P÷2

         =36+1000-1020÷16 / 1000+1020÷2

          =0.03435/3.44%

Since this is a semi annual rate to get the annual rate we multiply by 2

3.44%*2 =6.88%