Ajax Corporation issued 10,000 units of $1,000 face value bonds that mature in 20 years and have a 4% coupon rate that is paid semi-annually. If the bonds were sold at 96.5% of their face value,
Calculate the yield to maturity on the date of the issue.

Question

Quizplus · Accepted Answer

The yield to maturity is the annual rate of return an investor can expect to receive if they hold the bond until maturity. It is calculated using the following formula:YTM = (C + (FV - PV) / N) / ((FV + PV) / 2)where:C = the annual coupon paymentFV = the face value of the bondPV = the present value of the bondN = the number of years to maturityIn this case, the annual coupon payment is $40 (4% of $1,000), the face value of the bond is $1,000, the present value of the bond is $965 (96.5% of $1,000), and the number of years to maturity is 20. Plugging these values into the formula, we get:YTM = (40 + (1000 - 965) / 20) / ((1000 + 965) / 2)= (40 + 35 / 20) / ((1000 + 965) / 2)= (40 + 1.75) / ((1965) / 2)= 41.75 / 982.5= 0.0425= 4.25%Therefore, the yield to maturity on the date of the issue is 4.25%.

Ajax Corporation Issued 10,000 Units of $1,000 Face Value Bonds