A one-year discount bond with a par value of $5000 sold today, at issuance, for $4750 has a yield to maturity of

Question

Quizplus · Accepted Answer

To calculate the yield to maturity (YTM), we need to use the formula:
YTM = (Annual Interest + ((Par Value - Purchase Price) / Number of Years)) / ((Par Value + Purchase Price) / 2)
Here, the par value is $5000, the purchase price is $4750, and the bond has a maturity of one year, so the number of years is 1.
The annual interest is the difference between the par value and the purchase price, which is $250.
Plugging these values into the formula, we get:
YTM = (250 + ((5000 - 4750) / 1)) / ((5000 + 4750) / 2) = 0.0526 or 5.26%
Therefore, the answer is B.

A One-Year Discount Bond with a Par Value of $5000