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?

Question

Taryn Lambert

Business

10 February, 01:32

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?

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Alma Hogan · Answer 1

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%