Ringtones 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 is the annual rate of return an investor can expect to receive if they hold the 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%