Asked by Feisty Mochi on Jul 08, 2024
Verified
Ajax Corporation issued 10,000 units of $1,000 face value bonds that mature in 20 years and have a 4% coupon rate that is paid semi-annually. If the bonds were sold at 96.5% of their face value, calculate the yield to maturity at the end of year 4.
A) 4.26%
B) 4.30%
C) 4.38%
D) 4.44%
E) 4.50%
Coupon Rate
The interest rate on a bond paid by the issuer, which is a fixed percentage of the bond's face value, yielding regular interest payments to the bondholder.
Yield To Maturity
The total return anticipated on a bond if it is held until the date of its maturity, including all interest and principal repayments.
Semi-Annually
Occurring or calculated twice a year, often used in the context of interest payments or other financial assessments.
- Acquire proficiency in comprehending yield to maturity (YTM) and the analytic method for calculating it within the bond market.
Verified Answer
SP
Sharma PratimaJul 12, 2024
Final Answer :
B
Explanation :
The yield to maturity (YTM) can be calculated using a financial calculator or spreadsheet software by inputting the present value (PV) as -$965 (since the bonds were sold at 96.5% of their face value), the future value (FV) as $1,000 (the face value of the bond), the payment (PMT) as $20 (since the coupon rate is 4% of the $1,000 face value, paid semi-annually, which equals $40 annually or $20 per period), the number of periods (N) as 32 (since there are 16 years left until maturity and payments are semi-annual, so 16*2), and then solving for the interest rate per period and doubling it for an annual rate. This calculation yields a YTM close to 4.30%, making choice B the correct answer.
Learning Objectives
- Acquire proficiency in comprehending yield to maturity (YTM) and the analytic method for calculating it within the bond market.