The formula to calculate the Bond Yield (YTM) is:
\[ p = \sum_{k=1}^{n} \frac{cf}{(1+r)^k} \]
Where:
A bond yield, often known as the yield to maturity (YTM), represents the rate of return for bond investors, given that the investors hold the bond until it matures and reinvest the coupons at an interest rate equal to the YTM. The YTM calculation is a complex iterative process that involves solving the bond price equation for the yield.
Let's assume the following for Bond A:
Step 1: Determine the bond price:
The bond price is given as $980.
Step 2: Determine the face value:
The face value is given as $1,000.
Step 3: Calculate the coupon per period:
\[ \text{Coupon per period} = \frac{1,000 \times 5\%}{1} = $50 \]
Step 4: Determine the years to maturity:
The years to maturity is given as 10 years.
Step 5: Calculate the bond yield (YTM) using an iterative method:
After performing the iteration, the bond yield (YTM) is found to be approximately 5.26%.
