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29 May, 18:57

Parkway Void Co. issued 15-year bonds two years ago at a coupon rate of 9.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?

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  1. 29 May, 19:21
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    4.42% semiannually OR 8.84% annually

    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

    Assuming the Face value of the Bond is $1,000

    Coupon Payment = C = $1,000 x 9.4% = $94 annually = $47 semiannually

    Price of the Bond = P = $1,000 x 105% = $1,050

    Numbers of period = n = 15 years x 2 = 30 periods

    Use Following Formula to calculate YTM

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

    Yield to maturity = [ $47 + ($1,000 - $1,050) / 30 ] / [ ($1,000 + $1,050) / 2 ]

    Yield to maturity = $45.33 / $1,025 = 0.0442

    Yield to maturity = 4.42% semiannually OR 8.84% annually
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