Thatcher Corporation's bonds will mature in 12 years. The bonds have a face value of $1,000 and an 11.5% coupon rate, paid semiannually. The price of the bonds is $1,050. The bonds are callable in 5 years at a call price of $1,050. Do not round intermediate calculations. Round your answers to two decimal places. What is their yield to maturity?
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P = price of the bond ($1,050 in this case)
C = coupon payment per period ($1,000 * 11.5% / 2 = $57.50)
F = face value of the bond ($1,000)
r = yield to maturity (the rate we want to find)
n = total number of periods (12 years * 2 semiannual periods = 24 periods)
Given:
Price of the bonds = $1,050
Face value = $1,000
Coupon payment (C) = $57.50 (semiannual payment)
Total periods (n) = 12 years * 2
Total periods (n) = 24 periods.
Using this information, we can solve for the yield to maturity using financial calculators or spreadsheet software to find the rate that makes the present value of the bond's cash flows equal to the price of the bond.
The yield to maturity for these bonds is approximately 10.52%.