Parkway Void Co. issued 16-year bonds two years ago at a coupon rate of 8.5 percent. The bonds make semiannual payments. If these bonds currently sell for 109 percent of par value, what is the YTM? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

The annual YTM will be = 0.07518796992 or 7.518796992% rounded off to 7.52%

Explanation:

The yield to maturity or YTM is the yield or return that an investor can earn on the bond if the bond is purchased today and is held till the bond matures. The formula to calculate the Yield to maturity of a bond is as follows,

YTM = [ ( C + (F - P / n))  /  (F + P / 2) ]

Where,

C is the coupon payment

F is the Face value of the bond

P is the current value of the bond

n is the number of years to maturity

Lets assume the par value is 1000.

Current value = 1000 * 109% = 1090

Coupon payment = 1000 * 0.085 * 6/12 = 42.5

Number of periods remaining till maturity = 14 * 2 = 28

semi annual YTM = [ (42.5 + (1000 - 1090 / 28))  /  (1000 + 1090 / 2)

semi annual YTM = 0.03759398496 or 3.759398496% rounded off to 3.76%

The annual YTM will be = 0.03759398496 * 2 = 0.07518796992 or 7.518796992% rounded off to 7.52%

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