Gabriel Corporation has outstanding $1,000, 8% semi-annual coupon bonds. The bonds have fourteen years remaining to maturity. If the current price for these bonds is $1,118.74, what is the annualized yield to maturity?

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) can be calculated using the bond price formula, considering the semi-annual interest payments and the time to maturity. Given the bond's price of $1,118.74, a face value of $1,000, a coupon rate of 8% (which translates to $40 semi-annually since 8% of $1,000 is $80 per year), and 14 years to maturity (or 28 periods semi-annually), the YTM reflects the interest rate that equates the present value of all future cash flows from the bond (coupon payments and the repayment of the principal) to the bond's current price. The correct YTM, considering semi-annual compounding, is approximately 6.68% annually when solving for the rate that matches the given price. This involves a financial calculator or an iterative process using a bond pricing formula, where the calculated YTM that aligns with the given price is option A) 6.68%.

Gabriel Corporation Has Outstanding $1,000, 8% Semi-Annual Coupon Bonds