Question

Skolits Corp. issued 20-year bonds 2 years ago at a coupon rate of 8.9 percent. The bonds make semiannual payments. If these bonds currently sell for 110 percent of par value, what is the YTM

Answer 1

The YTM is 7.85%

Step-by-step explanation:

Since 20 year bonds were issued 2 years ago,

Time to Maturity = 18 years

Coupon Rate = 8.9%

Lets assume that the par value of the bond is $100

The bonds make semi-annual payments,

Therefore, number of periods = 18 × 2 = 36

Semi-annual Coupon =( 8.9% × 100 ) / 2 = $4.45

Current Value of Bond = 110% of par value = 1.1 × 100 = $110

YTM is the discount rate which makes the present value of all the future cash flows equal to the current value of the bond, that is $110 , which means

110 =
`4.45/(1+r)^1` +
`4.45/(1+r)^2` + ... +
`4.45/(1+r)^{35` +
`104.45/(1+ r)^{36`

where, r is YTM/2

r = 3.927%

Therefore, YTM = 3.927 × 2 = 7.85%