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 at the end of year 10.

Question

Quizplus · Accepted Answer

Step 1: Calculate the Present Value of the bond

PV = $1,000 x 0.965
PV = $965

Step 2: Calculate the coupon payment

Annual coupon payment = Face value x Coupon rate
Annual coupon payment = $1,000 x 0.04
Annual coupon payment = $40

Semi-annual coupon payment = Annual coupon payment / 2
Semi-annual coupon payment = $40 / 2
Semi-annual coupon payment = $20

Step 3: Calculate the number of periods

Number of periods = 20 years x 2 semi-annual payments per year
Number of periods = 40

Step 4: Calculate the Yield to Maturity (YTM) using a financial calculator or Excel

Inputs:
PV = -$965 (negative because it is a cash outflow)
PMT = $20
FV = $1,000
N = 20 x 2 = 40

Output:
YTM = 4.44%

Therefore, the answer is D) 4.44%.

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