You just purchased a $1,100 par value, 8-year, 8 percent annual coupon bond that pays interest on a semiannual basis

Finance Aug 12, 2020

You just purchased a $1,100 par value, 8-year, 8 percent annual coupon bond that pays interest on a semiannual basis. The bond sells for $920. What is the bond’s nominal yield to maturity?

Expert Solution

Answer-

Par value = Future value = FV = $ 1100
Present value = Selling price = PV = $ 920
Number of periods = 8 year = 8 x 2 = 16 [ Semiannual payments bond]
Coupon payment = PMT = $ 1100 x 8 % / 2 = $ 1100 x 4 % = $ 44. [ Semi annually ]

Yield to maturity = YTM = I/Y = ?

Substituting the values in financial calculator we get

Yield to maturity = YTM = I/Y = 5.572 % [ Semiannually]

Yield of maturity of bond = YTM = I/Y = 11.144 % [ annually ]

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