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The Sisyphean Company has a bond outstanding with a face value of $1 000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semi-annually.
-Assuming that this bond trades for $903, then the YTM for this bond is closest to:

Question

Quizplus · Accepted Answer

To find the YTM, we need to use the bond pricing formula:
P= (C / (1+r)^1) + (C / (1+r)^2) + ... + (C + F / (1+r)^n)
where:
P= price of the bond
C= coupon payment (semi-annual)
F= face value of the bond
r= YTM (semi-annual)
n= number of periods (semi-annual)

In this case, we know:
P= $903
C= $40 (($1,000 x 8%) / 2))
F= $1,000
n= 30 (15 years x 2 semi-annual periods per year)

Using trial and error or a financial calculator, we find that a YTM of 9.2% makes the equation balance.
Therefore, the best choice is B.

Use the Information for the Question(s)below