The Sisyphean Company has a bond outstanding that matures in five years. The stated coupon rate for this bond is 8.5% and the coupon payments are to be made semiannually. The bond is quoted at 108.173. The yield to maturity (YTM) on this bond is closest to ________.

Question

BlackTom AI · Accepted Answer

Yield to maturity is the discount rate that makes the present value of the bond’s coupon payments and maturity value equal to its market price. For a semiannual coupon bond, compute the semiannual rate y that satisfies: Price = C * [1 - (1+y)^-N]/y + F/(1+y)^N.

Relevant data: coupon rate = 8.5% annually, semiannual coupon C = 8.5%/2 × 100 = $4.25 per $100 par. Maturity = 5 years → N = 10 semiannual periods. Quoted price = 108.173 means Price = $108.173 per $100 par. Face value F = $100 (par scale cancels out).

Set up equation:
108.173 = 4.25 * [1 - (1+y)^-10]/y + 100/(1+y)^10.

We solve for y (semiannual yield). Try y = 0.0328 (3.28% semiannual):

Compute (1+y)^10 = (1.0328)^10 ≈ 1.38043, so discount factor (1+y)^-10 ≈ 0.72426.
Annuity factor = [1 - 0.72426]/0.0328 = 0.27574/0.0328 ≈ 8.410.
PV of coupons = 4.25 * 8.410 ≈ 35.783.
PV of face = 100 * 0.72426 ≈ 72.389.
Total PV = 35.783 + 72.389 ≈ 108.172 ≈ quoted 108.173.

Thus the semiannual rate is 3.28%. The convention for YTM on semiannual-pay bonds is to quote the nominal annual rate with semiannual compounding = 2 × 3.28% = 6.56%. (The effective annual yield would be (1.0328)^2 - 1 ≈ 6.67%.)

Why the correct answer is 6.56%: it is the nominal annual YTM corresponding to the semiannual rate that exactly prices the bond at 108.173. Other options are incorrect: 9.18% and 7.87% are higher nominal rates that would produce a lower price than 108.173; 3.28% is the semiannual rate rather than the annual YTM as conventionally reported; “unknown since the par value is not given” is wrong because price is quoted as percent of par and par cancels out in the yield calculation.

Final answer confirmed: 6.56%.

The Sisyphean Company has a bond outstanding that matures in five years. The stated coupon rate for this bond is 8.5% and the coupon payments are to be made semiannually. The bond is quoted at 108.173. The yield to maturity (YTM) on this bond is closest to ________.Single choice

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