West Corp. issued 18-year bonds 2 years ago at a coupon rate of 9.5 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?

The answer is 4.232%

Explanation:

The formula for determining the price of a bond which can also be used to find Yield-to-Maturity (YTM) is:

PV = PMT / (1+r) ^1 + PMT / (1+r) ^2 ... PMT / (1+r) ^1 PMT + FV / (1+r) ^n

We are to calculate Yield-to-Maturity (YTM) which is the rate of return on the bond to an investor.

Using a Financial calculator. Input the following:

N = (18 years - 2years) x 2 = 32

1/Y = ?

PV = 109

PMT = 9.5/2 = 4.75

FV = 100

1/Y = 4.232%