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Rogue Racing Inc. 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

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hyderali230

Answer:

Yield to maturity is 4.8%

Explanation:

Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity.

Face value = F = $1,000

Assuming Coupon payments are made annually

Coupon payment = $1,000 x 8% / 2 = $40

Selling price = P = $876.40

Number of periods = n = 12 years x 2 = 24

Yield to maturity = [ C + ( F - P ) / n ] / [ (F + P ) / 2 ]

Yield to maturity = [ $40 + ( 1000 - $876.40 ) / 24 ] / [ (1,000 + $876.40 ) / 2 ]

Yield to maturity = [ $40 + 5.15 ] / $938.2 = $45.15 /$938.2 = 0.048 = 4.8%