The Timberlake-Jackson Wardrobe Co. has 11.4 percent coupon bonds on the market with seven years left to maturity. The bonds make annual payments.

The Timberlake-Jackson Wardrobe Co. has 11.4 percent coupon bonds on the market with seven years left to maturity. The bonds make annual payments.

Required:

If the bond currently sells for $1,115.37, what is its YTM? (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Yield to maturity

%

rev: 05-02-2011

Explanation:

Here, we need to find the YTM of a bond. The equation for the bond price is:

P = $1,115.37 = $114(PVIFAR%,7) + $1,000(PVIFR%,7)

Notice the equation cannot be solved directly for R. Using a spreadsheet, a financial calculator, or trial and error, we find:

R = YTM = 9.10%

If you are using trial and error to find the YTM of the bond, you might be wondering how to pick an interest rate to start the process. First, we know the YTM has to be lower than the coupon rate since the bond is a premium bond. That still leaves a lot of interest rates to check. One way to get a starting point is to use the following equation, which will give you an approximation of the YTM:

Approximate YTM = [Annual interest payment + (Par value – Price) / Years to maturity] / [(Price + Par value) / 2]

Solving for this problem, we get:

Approximate YTM = [$114 + (–$115.37 / 7)] / [($1,115.37 + 1,000) / 2]

Approximate YTM = .0922 or 9.22%

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter

7

±$1,115.37

$114

$1,000

N

I/Y

PV

PMT

FV

Solve for

9.10%