What is the annual and semi-annual yield-to-maturity (YTM) on a $1,000 principal value, 4.80% annual coupon paying McDonald's Corporation bond if the investor buys the bonds at a price of $1,175 and holds it twenty years?

Annual YTM = 2.824%

Semi Annual YTM = 1.402%

Explanation:

Semi - Annual YTM

We know,

Expected YTM (Semi-annual) =

Given,

I = Coupon payment = Coupon rate × Bond Par value = $1,000 × 4.80% = $48

Semiannual coupon payment = $48/2 = $24

M = Bond Par value = $1,000

Vo = Market value of Bond = $1,175

n = number of years (period) = 20

Putting all the values into the formula, we can get,

Expected annual YTM =

or, expected annual YTM =

or, YTM = 0.01402

Therefore, semiannual YTM = 1.402%

Annual Expected YTM = 2 × 0.01402 = 0.02804 or, 2.804%

Therefore, annual YTM = (1 + Semiannual YTM)^2 - 1

or, annual YTM = (1 + 0.01402)^2 - 1

annual YTM = 0.02824

Therefore, annual YTM = 2.824%

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