An Exxon bond carries an 8 percent coupon, pays interest semiannually, and has 10 years to maturity. If this bond is currently selling for $925, what is the exact yield to maturity (to the nearest tenth of 1 percent)?

Question

Quizplus · Accepted Answer

The correct answer is A because the yield to maturity is 9.2%. This can be calculated using the following formula:YTM = (C + (FV - PV) / N) / ((FV + PV) / 2)where:YTM = yield to maturityC = coupon paymentFV = face valuePV = present valueN = number of periodsIn this case, the coupon payment is $40 ($800 * 0.05), the face value is $1,000, the present value is $925, and the number of periods is 20 (10 years * 2 semiannual payments per year). Plugging these values into the formula, we get:YTM = (40 + (1,000 - 925) / 20) / ((1,000 + 925) / 2)YTM = (40 + 75 / 20) / ((1,925) / 2)YTM = (40 + 3.75) / 962.5YTM = 43.75 / 962.5YTM = 0.0454YTM = 9.2%

An Exxon Bond Carries an 8 Percent Coupon, Pays Interest