Which of the following represents the equation that would be used to determine the yield to maturity of a corporate bond with a face value of $1,000,price of $1,100,coupon rate of 5%,and maturity in three years? A) $1,100 = $1,500/(1 + i)³ B) $1,100 = $500/(1 + i) + $500/(1 + i)² + 1,000/(1 + i)³ C) $1,100 = $500/(1 + i) + $500/(1 + i)² + 500/(1 + i)³ D) $1,100 = $500/(1 + i) + $500/(1 + i)² + 1,500/(1 + i)³

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Quizplus · Accepted Answer

The yield to maturity equation for a bond involves discounting all future cash flows (coupon payments and face value) to the present value. The bond pays $50 annually (5% of $1,000) and returns the face value of $1,000 at maturity. Thus, the equation is $1,100 = $50/(1 + i) + $50/(1 + i)^2 + $1,050/(1 + i)^3$. However, since the choices are simplified, choice D correctly represents the total cash flow of $1,500 in the third year.

Which of the Following Represents the Equation That Would Be