The Bonsai Nursery Corporation has $1,000 par value bonds with a coupon rate of 8% per year making semiannual coupon payments.If there are twelve years remaining prior to maturity and these bonds are selling for $876.40,what is the yield to maturity for these bonds?

Question

Quizplus · Accepted Answer

First, we need to calculate the semiannual coupon payment:
Coupon payment = ($1,000 par value) x (8% annual coupon rate / 2 semiannual periods) = $40
Next, we need to calculate the total number of semiannual coupon periods:
Number of semiannual periods = (12 years) x (2 semiannual periods per year) = 24 semiannual periods
Then, we can use the bond pricing formula to solve for the yield to maturity (YTM):
Bond price = (Coupon payment / YTM) x [1 - 1 / (1 + YTM)^n] + (Par value / (1 + YTM)^n)
$876.40 = ($40 / YTM) x [1 - 1 / (1 + YTM)^24] + ($1,000 / (1 + YTM)^24)
Using trial and error or a financial calculator, we can solve for YTM = 9.77%. Therefore, the correct answer is choice C, 9.77%.

The Bonsai Nursery Corporation Has $1,000 Par Value Bonds with a Coupon