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15 December, 23:37

The Petit Chef Co. has 7 percent coupon bonds on the market with 9 years left to maturity. The bonds make annual payments and have a par value of $1,000. If the bonds currently sell for $1,038.50, what is the YTM?

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  1. 15 December, 23:47
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    The YTM is 6.45%

    Explanation:

    Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity.

    Face value = F = $1,000

    Coupon payment = $1,000 x 7% = $70

    Selling price = P = $1,038.50

    Number of payment = n = 9 years

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

    Yield to maturity = [ $70 + ($1,000 - $1,038.5) / 9 ] / [ (1,000 + $1,038.5) / 2 ]

    Yield to maturity = [ $70 - $4.28 ] / $1,019.25 = $65.72 / $1,019.25 = 0.0645 = 6.45%
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