Face value of a bond is RS 1000, coupon rate 4.25% paid semi-annually and matures in 10 years. If present value of bond is Rs 918.23, what is tield to maturity ?
Answer & explanation
Correct answer: option 2
The correct answer is option (2) : 5.25% p.a
$F= ₹1000$
$r=\frac{4.25}{2}=2.125$% per half year
$N= 10×2= 20 $ half year
$P.V.= ₹918.23 $ d=?
$C=1000×\frac{2.125}{100}$
$C= ₹21.25$
Approx YTM=$\frac{C+\frac{F-P.V.}{N}}{\frac{1918.23}{2}}=\frac{\frac{21.25+1000-918.23}{20}}{\frac{1000+918.23}{2}}$
$=\frac{\frac{21.25+81.77}{20}}{\frac{1918.23}{2}}=0.0264$
Approx YTM $=0.0264 = 2.64 $% per half year
$=5.28$% p.a