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25 November, 21:06

The National Insurance Corporation has $1,000 par value bonds with a coupon rate of 8% per year making semiannual coupon payments. If there are twelve years remaining prior to maturity and these bonds are selling for $876.40, what is the yield to maturity for these bonds?

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  1. 25 November, 21:35
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    YTM is 9.625%

    Explanation:

    Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity.

    Face value = F = $1,000

    Coupon payment = $1,000 x 8% = $80/2 = $40 semiannually

    Selling price = P = $876.40

    Number of payment = n = 12 years x 2 = 24

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

    Yield to maturity = [ $40 + (1000 - 876.4) / 24 ] / [ (1,000 + 876.4) / 2 ]

    Yield to maturity = 9.625%
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