The National Insurance Corporation has $1,000 par value bonds with a coupon rate of 8% per year making semiannual coupon payments.If there are twelve years remaining prior to maturity and these bonds are selling for $876.40,what is the yield to maturity for these bonds?

Question

Quizplus · Accepted Answer

To find the yield to maturity (YTM) we need to use the formula:
PV = C (1 - 1/(1+r)^n)/r + FV/(1+r)^n where PV is the price of the bond, C is the semiannual coupon payment, r is the yield to maturity, n is the number of periods (in this case, twice the number of years remaining until maturity), and FV is the face value of the bond ($1,000).

Plugging in the given values:
PV = $876.40
C = $1,000 x 8% / 2 = $40
n = 2 x 12 = 24
FV = $1,000

We need to solve for r. This involves trial and error or the use of financial calculator or spreadsheet software. The closest answer to the calculated YTM of 9.77% is C) 9.77%. Therefore, the best choice is C.

The National Insurance Corporation Has $1,000 Par Value Bonds with a Coupon