Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $832. The yield to maturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature? A. 2.10 years B. 4.19 years C. 7.41 years D. 9.16 years E. 18.32 years

A. 2.10 years

Explanation:

Use following formula to calculate the numbers of years to maturity of the bond.

Price of the bond  = [ Periodic Coupon payment x ( 1 - ( 1 + periodic yield to maturity )^-numbers of periods ) / Periodic yield to maturity ] + [ Face value / ( 1 + periodic yield to maturity )^numbers of periods

where

Price of the bond  = $832

Periodic Coupon payment = $1,000 x 6.5% x 6/12 = $32.5

Periodic yield to maturity = 16.28% x 6/12 = 8.14%

Face value = $1,000

Numbers of periods = ?

Placing values in the formula

$832  = [ $32.50 x ( 1 - ( 1 + 8.14% )^-numbers of periods ) / Periodic 8.14% ] + [ $1,000 / ( 1 + 8.14% )^numbers of periods ]

Numbers of periods = 4.20 period

Numbers of years = 4.20 x 12/6 = 2.10 years

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