Suppose a five year bond with a 7% coupon rate and semiannual compounding is traded for a price of $951

Finance Apr 01, 2021

Suppose a five year bond with a 7% coupon rate and semiannual compounding is traded for a price of $951.58. Expressed as an APR with semiannual compounding, the sponsor yield to maturity YTM is closest to:

a. 8.2%

b. 7.8%

c. 7.0%

d. 7.5%

Expert Solution

Computation of Yield to Maturity using Rate Function in Excel:

=rate(nper,pmt,-pv,fv)*2

Here,

Rate = Yield to Maturity = ?

Nper = 5 years*2 = 10 periods

PMT = 1,000*7%/2 = $35

PV = $951.58

FV = $1,000

Substituting the values in formula:

=rate(10,35,-951.58,1000)

Rate or Yield to Maturity = 8.2%

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