Moonhigh,Inc. has a 5%,semiannual coupon bond with a current market price of $988.52. The bond has a par value of $1,000 and a yield to maturity of 5.29%. How many years is it until this bond matures?

Question

Quizplus · Accepted Answer

Using the formula for present value of a bond, we can solve for the number of years until maturity:

PV = (C/2)/ (1 + r/2)^n + (FV) / (1 + r/2)^n
where PV = current market price, C = coupon payment, r = yield to maturity, FV = par value, and n = number of periods.

Plugging in the given values: 
PV = $988.52
C = $25 ($1,000 par value x 5% coupon rate / 2 payments per year)
r = 5.29% or 0.0529
FV = $1,000

We can solve for n by trial and error using a financial calculator or spreadsheet. Alternatively, we can use an online bond calculator and adjust the years until maturity until the calculated present value is closest to $988.52.

The closest answer is B) 4.5 years.