Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000.They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125.What is their yield to maturity (YTM)?

Question

Quizplus · Accepted Answer

To calculate the yield to maturity (YTM) of a bond, we must find the interest rate at which the present value of the bond's future cash flows (coupon payments and par value) equals the current market price. In this case, we can use trial and error or an Excel function called "RATE" to find the YTM.

Using the RATE function in Excel, we enter the following values:
- Nper (number of periods) = 15
- Pmt (coupon payment) = -100 (negative because it's an outflow)
- Pv (present value) = 1080 (negative because it's an outflow)
- Fv (future value or par value) = 1000
- Type = 0 (because the payments are made at the end of each period)

We leave the guess argument blank to let Excel find a solution. The YTM that Excel calculates is 9.01%, which is closest to choice B. Therefore, B is the correct answer.