Dave Harris has just purchased a bond with a face value of $1,000 that pays 4 percent.The purchase price of the bond was $950,and the bond will mature in 5 years.What is the yield to maturity for this bond (round to the nearest tenth of a percent)?
A)4.0 percent
B)6.0 percent
C)5.1 percent
D)8.2 percent
E)9.0 percent

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) for a bond can be calculated using a financial calculator or an iterative process since the formula for YTM is not straightforward. However, the YTM essentially reflects the total return anticipated on a bond if the bond is held until it matures. It takes into account the purchase price, the face value, the coupon rate, and the time to maturity. Given the purchase price of $950, a face value of $1,000, a 4% coupon rate, and a maturity of 5 years, the YTM is approximately 5.1%. This accounts for both the annual interest payments and the capital gain (the difference between the purchase price and the face value) that will be realized at maturity.

Dave Harris Has Just Purchased a Bond with a Face