Rogue Recovery Inc.wishes to issue new bonds but is uncertain how the market would set the yield to maturity.The bonds would be 20-year,7% annual coupon bonds with a $1,000 par value.The firm has determined that these bonds would sell for $1,050 each.What is the yield to maturity for these bonds?

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) is the annual rate of return an investor can expect to receive if they hold a bond until maturity. It is calculated using the following formula:YTM = (C + (FV - PV) / N) / ((FV + PV) / 2)where:C = annual coupon paymentFV = face value of the bondPV = present value of the bondN = number of years to maturityIn this case, the annual coupon payment is $70 (7% x $1,000), the face value of the bond is $1,000, the present value of the bond is $1,050, and the number of years to maturity is 20. Plugging these values into the formula, we get:YTM = (70 + (1,000 - 1,050) / 20) / ((1,000 + 1,050) / 2)YTM = (70 - 25) / 1,025YTM = 45 / 1,025YTM = 0.0439YTM = 4.39%Therefore, the yield to maturity for these bonds is 4.39%, or approximately 6.54%.