A bond with a $114 annual coupon, maturing in 10 years at a value of $1,000 has a current market price of $920. What is the yield to maturity of the bond?

Question

Quizplus · Accepted Answer

The yield to maturity is the annual rate of return an investor can expect to receive if they hold the bond until maturity. It is calculated using the following formula:YTM = (C + (FV - PV) / N) / ((FV + PV) / 2)where:C = annual coupon paymentFV = face value of the bondPV = present value of the bondN = number of years to maturityIn this case, the annual coupon payment is $114, the face value of the bond is $1,000, the present value of the bond is $920, and the number of years to maturity is 10. Plugging these values into the formula, we get:YTM = (114 + (1000 - 920) / 10) / ((1000 + 920) / 2)= (114 + 80) / 960= 194 / 960= 0.2021= 20.21%Therefore, the yield to maturity of the bond is 20.21%, which is closest to answer choice C, 12.9%.

A Bond with a $114 Annual Coupon, Maturing in 10