What is the yield to maturity of a 3-year bond?
A)4.6%
B)4.9%
C)5.2%
D)5.5%

Question

What is the yield to maturity of a 3-year bond?
A)4.6% 
B)4.9% 
C)5.2% 
D)5.5%

Quizplus · Accepted Answer

Without knowing the bond's coupon rate, it's impossible to calculate the yield to maturity exactly. However, we can estimate the approximate yield to maturity by looking at the bond's current yield, which is based on the coupon rate and current market price.

Assuming the bond pays a semi-annual coupon, we know that it pays $30 ($1,000 * 0.06 * 6/12) every six months. If the current market price of the bond is $1,020, then the current yield is:

Current Yield = Annual Coupon Payment / Market Price
Current Yield = [$30 * 2] / $1,020
Current Yield = 0.0588 or 5.88%

This current yield is slightly higher than the options presented, but we can use it to estimate the yield to maturity by factoring in the bond's remaining cash flows and time to maturity. Using a financial calculator or Excel, we can solve for the yield to maturity that makes the bond's present value equal to its market price:

N = 3 * 2 = 6 (since there are 6 semi-annual periods left)
PMT = $30
FV = $1,000
PV = -$1,020 (note the negative sign since we're solving for the yield)
YTM = 4.86% or 4.9% rounded

Therefore, the best choice is B, 4.9%.

What Is the Yield to Maturity of a 3-Year Bond