What would you pay for a bond that pays an annual coupon of $35, has a
face value of $1,000, matures in 7 years, and has a yield to
maturity(YTM)of 8%?

Hi pheifer-ga,

The implied purchase price is in the range $765.70 to $765.73.

The calculation is complex, so people usually use calculators with the
method built in.  Multiple yield-to-maturity calculators are available
for free use on the World Wide Web.  They typically have the purchase
price as an input, not an output, so to get this answer, I tried
various purchase prices until the yield to maturity came out at 8%.

I got three yield-to-maturity calculators to agree on the result
above.

Kiplinger.com offers a calculator at:

http://www.calcbuilder.com/cgi-bin/calcs/5.8/BON1.cgi/Kiplinger

I entered the following values to get a yield to maturity of 8.03%:

Price you paid:  76% (the calculator does not allow fractions of a
percent)
Face value:  $1000
Coupon rate:  3.50%
Months to maturity:  84
Your coupon income is invested elsewhere at a rate of:  8%
Type of bond:  This didn't matter, since I was looking at the taxable
yield.

The key to making this calculation work was entering 8% as the rate
earned on the coupon income invested elsewhere.  The other calculators
apparently had this assumption built in.

SmartMoney.com's calculator is at:

http://www.smartmoney.com/onebond/index.cfm?story=bondcalculator

To get a yield of 8.00%, I entered:

Price:  76.57
Coupon rate:  3.5%
Matures on:  Oct 2010 (7 years from now)

Finally, the MoneyChimp web site has an explanation of the calculation
at:

http://www.moneychimp.com/articles/finworks/fmbondytm.htm

with a calculator on a popup window from that page.  To get a yield to
maturity of 8.000% with this calculator, I entered:

Current price:  $765.70
Par value:  $1000
Coupon rate:  3.5%
Years to maturity:  7

I found the MoneyChimp calculator the easiest to use.  I used it to
find the exact range of cents in the purchase price that gave a yield
to maturity of 8.000%.


Search Strategy:

"yield to maturity" calculator


I hope this information is helpful.  If you need any further
explanation, please ask for a clarification.

--efn-ga

The research was done quickly and accurately. Thankyou sooo much for
all your help. I will definitely use this website in the future!