Question
Asked Nov 3, 2019
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 A bond has an annual 8 percent coupon rate, a maturity of 10 years, a face value of $1,000, and makes semiannual payments.   If the price is $934.96, what is the annual nominal yield to maturity on the bond?

 

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Expert Answer

Step 1

The formula to calculate price of bond is given below,

1-(1+)
Face value
Bond price Px Coupon paymentx
Px(1+aP-1
(1+i)
Here
i is yield to maturity
Pis number of payment period in one interest period
nis number of periods
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1-(1+) Face value Bond price Px Coupon paymentx Px(1+aP-1 (1+i) Here i is yield to maturity Pis number of payment period in one interest period nis number of periods

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Step 2

Substitute $40 for coupon payment, 2 for P, 10 for n and $1,000 for face value,

-10
1-(1+)
$1,000
2x $40 x
Bond price
(1+i)
2x
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-10 1-(1+) $1,000 2x $40 x Bond price (1+i) 2x

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Step 3

Now calculate bond price a...

1-(1+0.09)10
$1,000
+
2x $40 x|
Bond price
(1+0.09)0
2x (1+0.09
1
$1,000
0.5775891931
= $80x
0.08806130178
2.367363675
$524.7155619+$422.4108069
=$947.1263688
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1-(1+0.09)10 $1,000 + 2x $40 x| Bond price (1+0.09)0 2x (1+0.09 1 $1,000 0.5775891931 = $80x 0.08806130178 2.367363675 $524.7155619+$422.4108069 =$947.1263688

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