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Chapter 4: Q.2 (page 114)

What is the formula used to calculate the yield to maturity on a 20-year coupon bond with a current yield of 12% and \(1,000 face value that sells for \)2,500

Short Answer

Expert verified

The yield to maturity is 3.33%

Step by step solution

01

Step 1. Introduction

A coupon is a payment of interest received by a bondholder from the date of issuance to the bond's maturity date. The "coupon rate," which is computed by summing the total number of coupons paid each year and dividing it by the bond's face value, is the most common way of describing coupons.

02

Step 2. Explanation

CouponAmount=CouponRate脳FaceValue=10%脳1000=100YieldtoMaturity=Couponamount+((Facevalue-sellingprice)/n)(Facevalue+sellingprice)/2=100+((1000-2000)/20)(1000+2000)/2=100+(-1000/20)(3000/2)=100-501500=501500=3.33%

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