The formula to calculate the Bond Yield to Maturity (YTM) is:
\[ \text{bond price} = \sum_{k=1}^{n} \left[ \frac{cf}{(1+r)^k} \right] \]
Where:
Yield to Maturity (YTM) represents the rate of return of a bond investment if the investor holds the bond until maturity and reinvests the coupons at the YTM rate. It is a comprehensive measure of a bond's overall return, considering both the interest payments and the capital gain or loss if the bond is held to maturity.
Let's assume the following for Bond A:
Step 1: Determine the face value:
The face value is given as $1,500.
Step 2: Calculate the bond price:
The bond price is given as $1,350.
Step 3: Calculate the coupon per period:
\[ \text{Coupon per period} = \frac{1,500 \times 6\%}{1} = $90 \]
Step 4: Determine the years to maturity:
The years to maturity is given as 15 years.
Step 5: Calculate the bond yield (YTM) using the Newton-Raphson method:
After performing the iteration, the bond yield (YTM) is found to be approximately 7.11%.
