Holmia Tech's non-callable bonds have a face value of $1,000, and pay a 10 percent semiannual coupon. In other words, there is a coupon payment of $50 every six months. Each bond has 12 years until maturity, and sells at a price of $1,080. What is the bond's nominal yield to maturity?
A) 8.60%
B) 8.75%
C) 8.90%
D) 9.15%
E) 9.30%

Question

Quizplus · Accepted Answer

The bond's yield to maturity (YTM) can be calculated using the formula for the present value of a bond, which equates the bond's price to the present value of its future cash flows (coupon payments and the face value at maturity). Given the semiannual coupon payments and the bond selling at a premium ($1,080 > $1,000), the YTM must be less than the coupon rate of 10%. The correct YTM is found by solving the bond pricing equation for YTM, which requires financial calculator or spreadsheet software. The correct answer, 8.90%, reflects the bond's semiannual YTM of 4.45% (since payments are semiannual) multiplied by 2.

Holmia Tech's Non-Callable Bonds Have a Face Value of $1,000