Consider a 10 percent coupon bond with three years to maturity. The annual coupon is $100, which is paid $50 every six months, and the total number of semiannual periods is six. Assume that the bond is selling at a premium with a current market price of $1,052.10. Because of the inverse relation between bond prices and market yields, it is clear that yields have declined since the bond was originally issued, because the price is greater than $1,000. Using Equation 17‐4, we can illustrate conceptually what is happening when we solve for ytm, although to actually solve for ytm we would use a calculator or computer.

Equation 17‐4

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n P-Σ = Ε FV (1+ytm) (1+ytm)" (17-4)