a ten year bond pays 11% interest on a $1000 face value annually. If it currently sells for $1195.00 what is its approximate yeild to maturity?
To calculate the approximate yield to maturity (YTM) of a bond, we need to use the formula:
YTM = (Annual Interest Payment + [(Face Value - Current Price) / Number of Years]) / ((Face Value + Current Price) / 2)
In this case, we have the following information:
Annual Interest Payment = 11% of $1000 = $110
Face Value = $1000
Current Price = $1195
Number of Years = 10
Let's plug these values into the formula:
YTM = ($110 + [($1000 - $1195) / 10]) / (($1000 + $1195) / 2)
First, calculate the numerator:
($1000 - $1195) / 10 = -$19.5
Then, calculate the denominator:
($1000 + $1195) / 2 = $1097.5
Now, substitute the values into the formula:
YTM = ($110 + (-$19.5)) / $1097.5
Calculate the numerator:
$110 + (-$19.5) = $90.5
Finally, calculate the YTM:
YTM = $90.5 / $1097.5
Now divide:
YTM = 0.0825
Approximately, the yield to maturity of the bond is 8.25%.