Question

watters umbrella corp. issued 15-year bonds two years ago at a coupon rate of 6.2 percent. the bonds make semiannual payments. if these bonds currently sell for 98 percent of par value, what is the ytm? (do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

According to the given information, Yield to maturity (YTM) of Watters umbrella corp. is 6.42%

current market value = $1,000 x 98% = $980

n = (15 - 2) x 2 = 2

coupon = $1,000 x 6.2% x 1/2 = $31

face value = $1,000

Yield to maturity (YTM) = [coupon + [(face value - market value)/n]} / [(face value + market value)/2]

Yield to maturity (YTM) = [31 + [(1,000 - 980)/26]} / [(1,000 + 980)/2]

Yield to maturity (YTM) = (31 + 0.77) / 990 = 31.77 / 990 = 0.03209 x 2 (annual yield) = 0.641818 = 6.42%

• Yield to maturity (YTM) is the overall rate of return a bond will have earned once it has paid all interest and repaid the principal.
• YTM is basically the internal rate of return (IRR) on a bond if held to maturity.
• The yield to maturity calculation can be challenging because it makes the assumption that all interest or coupon payments can be reinvested at the bond's rate of return.

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