Explore BrainMass

# Calculate yield to maturity

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

I need help with this practice problem. I am going to have something very similar on an exam and can't figure out how to solve it.

Bonds of Zello Corporation with a par value of \$1,000 sell for \$960, mature in 5 years, and have a 7% annual coupon rate paid semiannually. Calculate:
a. Current yield.

b. Yield to maturity (to the nearest whole percent, i.e., 3%, 4%, 5%, etc,).

c. Realized compound yield for an investor with 3-year holding period and a reinvestment rate of 6% over the period. At the end of 3 years the 7% coupon bonds with 2 years remaining will sell to yield 7%.

#### Solution Preview

Yield To Maturity:

The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as "yield" for short.

An approximate YTM can be found by using a bond-yield table. However, because calculating a bond's YTM is complex and involves trial and error, it is usually done by using a programmable business calculator.

Source: http://www.investopedia.com/terms/y/yieldtomaturity.asp

Yield to maturity (YTM) is the annualised rate of return in percentage terms on a fixed income instrument such as bond or debenture , taking into account coupon rates, frequency of payouts and capital gains or losses.
It is the composite rate of return of all payouts, coupon and capital gains.Say, you had a choice of investing in two bonds issued by two companies — one where you receive an interest warrant annually at 16 per cent and the other where the interest payout is spread out over 12 monthly instalments at a rate of 15.5 per cent. On the face of it, the first instrument offers you a higher return. But the coupon payments alone (payouts through interest warrants) do not give a correct picture about the yield of the instrument.
This is because the yield on an instrument will rise with the frequency of payouts. Does this mean that in the case of two instruments with identical coupon payment and payment frequency, there is no difference in the rate of return? No. Because, the yield to maturity also takes into account the capital gain (or loss) at the time of maturity.
If you were to purchase a bond with a face value of Rs 5,000 that offers a coupon of 16 per cent from the stock market at a price of Rs 5,800, your yield-to-maturity would be much lower. This is because you will ...

#### Solution Summary

The expert calculates yield to maturity.

\$2.19