Adams Enterprises’ noncallable bonds currently sell for $1,120. They have a 15- year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?
%7.17
how did you get this answer
7.17%
7.26%
To calculate the yield to maturity (YTM) of a bond, we need to use the formula:
PV = C × (1 - (1 + YTM)^(-n)) / YTM + Par / (1 + YTM)^n
Where:
PV = Present value or the current price of the bond ($1,120),
C = Annual coupon payment ($85),
YTM = Yield to maturity (unknown),
n = Number of years to maturity (15),
Par = Par value or face value of the bond ($1,000).
To find the YTM, we need to solve the equation for YTM using trial and error, or by using financial calculators or spreadsheet functions.
Let's use trial and error method:
1. Assume a trial YTM value.
2. Substitute the assumed YTM value into the equation.
3. If the left-hand side (LHS) of the equation is greater than the right-hand side (RHS), try a higher YTM. If LHS is smaller than RHS, try a lower YTM.
4. Adjust the trial YTM value and repeat steps 2 and 3 until LHS approximately equals RHS.
Based on this process, the YTM of the bond can be found to be approximately 6.71%.