A) The yield to maturity of a bond trading at $980, paying an annual coupon of 2

Question

A) The yield to maturity of a bond trading at $980, paying an annual coupon of 2.5%, on a face value of $1000, maturing 6 years from now, with the first coupon payable 1 year from now is:

B) The yield to maturity of a bond trading at $950, paying an annual couponof 3.5%, on a face value of $1000, maturing 8 years from now, with the first coupon payable 1 year from now is:

C) The yield to maturity of a bond trading at $1000, paying an annual coupon of 5%, on a face value of $1000, maturing 7 years from now, with the first coupon payable 1 year from now is:

Explanation / Answer

Approx Yield to maturity=[Annual coupon+(Face value-Present value)/time to maturity]/(Face value+Present value)/2

1.Annual coupon=$1000*2.5%=$25

Approx YTM=[25+(1000-980)/6]/(1000+980)/2

which is equal to

=2.87%(Approx).

2.Annual coupon=$1000*3.5%=$35

Approx YTM=[35+(1000-950)/8]/(1000+950)/2

which is equal to

=4.25%(Approx).

3.Annual coupon=$1000*5%=$50

Approx YTM=[50+(1000-1000)/7]/(1000+1000)/2

which is equal to

=5%

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