Parkway Void Co. issued 15-year bonds two years ago at a coupon rate of 5.4 percent. The bonds make semiannual payments. If these bonds currently sell for 106 percent of par value, what is the YTM

YTM = 4.795%

Explanation:

The formula for yield to maturity (YTM) is given as follows.

YTM = [C + (F - P) / N) / [ (F + P) / 2] where

C = Coupon payment

F = Face value of bond

P = Price of bond

N = Time to maturity

In the given scenario, note that the payments are semi-annual. Therefore:

C = 2.7% x 1000 = $27

F = $1000

P = 106% x $1000 = $1060

N = (15 - 2) x 2 = 26

YTM = [$27 + ($1000 - $1060) / 26] / [ ($1000 + $1060) / 2]

= $24.692 / $1030

= 2.3973%

In yearly terms, YTM = 2.3973% x 2

= 4.795%