Question

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?

Short answer

Yield to maturity is 8.4%

Step-by-step solution

Step 1. Introduction

Bonds are debt instruments that are issued by governments or businesses to raise funds. Bu purchasign a bond, an invest lends money to the issuer. In return, the investor gets the principal amount along with the interest at the maturity of the bond.

Step 2. Explanation

$$\begin{gathered} YTM=\frac{C-{\displaystyle \frac{Facevalue-Price}{n}}}{{\displaystyle \frac{Facevalue+Price}{2}}} \\ =\frac{54-{\displaystyle \frac{900-860.15}{2}}}{{\displaystyle \frac{900+860}{2}}} \\ =0.008399\% \\ =8.39\% \\ Approx=8.4\% \end{gathered}$$