Answer :
Final answer:
To calculate the yield to maturity (YTM) of a bond, you need to find the discount rate that equates the present value of the bond's cash flows to its current price. In this case, XYZ Corp. issued bonds 15 years ago at a coupon rate of 7 percent with semiannual payments. The bonds are currently selling for 98.5 percent of par value.
Explanation:
The yield to maturity (YTM) of a bond is the rate of return that an investor would earn if they held the bond until maturity and received all the interest payments due. In this case, XYZ Corp. issued bonds 15 years ago at a coupon rate of 7 percent, with semiannual payments. The bonds are currently selling for 98.5 percent of par value.
To calculate YTM, we need to find the discount rate that equates the present value of the bond's cash flows (interest payments and face value) to its current price. We can use the present value formula to find YTM:
PV = C/(1 + r) + C/(1 + r)^2 + ... + C/(1 + r)^n + (F + C)/(1 + r)^n
Where:
- PV is the current price of the bond
- C is the coupon payment
- r is the yield to maturity (YTM)
- n is the number of periods until maturity
- F is the face value of the bond
In this case, since the bond has a 7 percent coupon rate, semiannual payments, and 15 years until maturity, we can substitute the values into the formula:
0.985 = 3.5/(1 + r) + 3.5/(1 + r)^2 + ... + 3.5/(1 + r)^30 + (100 + 3.5)/(1 + r)^30
We can solve for r (YTM) using trial and error, a financial calculator, or a spreadsheet software.
Learn more about Yield to Maturity here:
https://brainly.com/question/33763413
#SPJ11
