Question

During recessionary periods, bonds that were issued many years ago have a higher coupon rate than currently issued bonds. Therefore, they may sell at a premium, a price higher than their face value, because of currently low coupon rates. A $50,000 bond that was issued 15 years ago is for sale for $60,000. What rate of return per year will a purchaser make if the bond coupon rate is 19% per year payable semi-annually, and the bond is due 5 years from now?

Answer 1

Answer:

YTM = 6.818%

Explanation:

$YTM = \frac{C + \frac{F-P}{n }}{\frac{F+P}{2}}$

C= cash payment of the bond: 50,000 x 19%/2 = 4,750

F= Face Value= 50000

P= purchase value=60000

n= number of payment= 5 years at 2 payment a year = 10

$YTM = \frac{4750 + \frac{50,000-60,000}{10 }}{\frac{50,000+60,000}{2}}$

Important: it is better to calculate the YTM using a financial calculator, this is an approximation