When I purchase a 10 percent coupon bond,I calculate a yield to maturity of 8 percent. If I hold this bond to maturity,then my return on this asset is
A) 10 percent.
B) 8 percent.
C) 12 percent.
D) there is not enough information to determine the return.

Question

Quizplus · Accepted Answer

When you purchase a 10 percent coupon bond and calculate a yield to maturity of 8 percent, you are essentially buying the bond at a discount. However, since the bond pays a fixed 10 percent coupon rate, you will still receive 10 percent of the face value of the bond as interest payments every year until maturity. Therefore, your return on the asset will be a combination of the interest payments plus the capital gain from buying the bond at a discount. When you hold the bond to maturity, the capital gain will be equal to the amount of discount you received when purchasing the bond. However, since the bond pays a fixed coupon rate, the yield to maturity will also be the same as your return on the asset. Therefore, your return on the asset will be 8 percent.

When I Purchase a 10 Percent Coupon Bond,I Calculate a Yield