West Corp. issued 17-year bonds 2 years ago at a coupon rate of 10.3 percent. The bonds make semiannual payments. If these bonds currently sell for 102 percent of par value, what is the YTM

The answer is 10.04%

Explanation:

Yield-to-maturity (YTM) is the of return an investor is expecting from its bonds.

The payment is semiannual.

Number of years, N is 30 years[ (7 years - 2 years) x 2]

YTM = ?

Present Value (PV) = $102 (102% of $100)

Coupon payment (PMT) = $5.15[ (10.3percent : 2) x $100]

Future Value (FV) = $100

Using Financial calculator, we have:

5.02percent

This is for semiannual

Therefore, annual YTM will be:

5.02 percent x 2

10.04%

10%

Explanation:

The actual return that an investor earn on a bond until its maturity is called the Yield to maturity. It is a long term return which is expressed in annual rate.

According to given data

It is assumed that face value of the bond is $1,000

Coupon Payment = C = $1,000 x 10.3% = $103 annually = $51.5 semiannually

Price of the Bond = P = $1,000 x 102% = $1,020

Numbers of period = n = (17-2) years x 2 = 30 periods

Use Following Formula to calculate YTM

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

Yield to maturity = [ $51.5 + ($1,000 - $1,020) / 30 ] / [ ($1,000 + $1,020) / 2 ]

Yield to maturity = $50.83 / $1,010 = 0.0503 = 5.03% = 5% per Semiannual

Yield to maturity = 5% x 2 = 10% annually

Yield to maturity = 3.56% semiannually OR 7.12% annually