Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 10-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM) ?

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25 January, 07:16

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 10-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM) ?

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Essence Irwin · Answer 1

8.8%

Explanation:

The fomula to calculate the yield to maturity is:

YTM = (C + ((FV-PV) / t)) / ((FV+PV) / 2)

C = Coupon

FV = Face value

PV = Present value

t = time to reach maturity

YTM = (100 + ((1,000-1,080) / 10)) / ((1,000+1,080) / 2)

YTM = (100 + (-8)) / 1,040

YTM = 92/1,040

YTM = 0,088 * 100 = 8.8%

Their yield to maturity (YTM) is 8.8%