Boomer Corp issued 20-year bonds two years ago at a coupon rate of 5.3 per cent. The bonds make semiannual payments. If these bonds currently sell for 105% of par value, what is the YTM?
Hint: With semi-annual coupon payments, the total annual coupon payment (PMT) is the same as with annual bonds, but the payments are made in 2 installments,
- Each payment is (par value * coupon rate)/2
- The number of payments is then the number of years to maturity * 2 (for the semi-annual payments)
- Note that the 20 year bonds were issued 2 years ago, that means there are only 18 years remaining to maturity (this is a case where you need to read the question very carefully)
- The face value (future value) remains unchanged
- The current price of the bond remains unchanged.Here, it is 105% of par value.We assume (always, unless told differently) that bonds have a par value of $1000.These means the current price (PV) is $1050
- When you solve for the YTM (yield to maturity), this value is the periodic rate, which is semi-annual as you entered the semi-annual payment and the number of semi-annual payments.
- To get the final answer, you multiply your calculated YTM by 2
Now, give the problem a try. The next few problems are all using semi-annual coupons, which is the way that U.S. bonds most commonly pay interest.