Question

A Telkom company bond carries an 8% coupon, paid semi-annually. The par

value is R1000, and the bond matures in six years. If the bond currently sells for

R911.37, what is its yield to maturity?

Answer 1

Solution

Number of periods $=\frac{2 \ periods }{year}\times (number\ of \ years)$

$=\frac{2 \ periods }{year}\times (6 \ years)= 12$

Par/ Face Value $=R1000$

Since the company bond carries an $8\%$ coupon, therefore,

$PMT=FV\times \frac{8\%}{2}=R40$

Current selling Price of Bond $= R 911.37$

Therefore, using

$911.37 = 40 \times \frac{{\left[ {1 - \frac{1}{{{{\left( {1 + r} \right)}^{12}}}}} \right]}}{r} + \frac{{1000}}{{{{\left( {1 + r} \right)}^{12}}}}$

Solving for yield rate $r$, we get

$r=0.1=10\%$

Therefore, yield to maturity is $10\%$