A 7.5 percent coupon bond with 16 years left to maturity is offered for sale at $834.92. What yield to maturity is the bond offering? (Assume interest payments are paid semiannually and par value is $1,000.)

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) of a bond is the internal rate of return (IRR) if the bond is held until maturity, considering all its payments (coupon payments and the return of the principal at maturity). The YTM is higher than the coupon rate when the bond is purchased at a discount (below par value), as in this case. The correct YTM cannot be directly calculated from the information given without using a financial calculator or solving the bond pricing formula, but it is understood that the YTM must be higher than the coupon rate (7.5%) since the bond is bought at a discount, and it must be reasonable given the price and the time to maturity. Among the options, 9.54% is the only rate significantly higher than the coupon rate, making it the correct choice.

A 75 Percent Coupon Bond with 16 Years Left to Maturity