A 5-year bond with 10% coupon rate and $1,000 face value is selling for $1,100.Calculate the yield to maturity on the bond assuming annual interest payments.

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) 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 $100 (10% of $1,000), the face value of the bond is $1,000, the present value of the bond is $1,100, and the number of years to maturity is 5. Plugging these values into the formula, we get:YTM = (100 + (1000 - 1100) / 5) / ((1000 + 1100) / 2)= (100 - 20) / 1050= 80 / 1050= 0.0762Therefore, the yield to maturity on the bond is 7.62%, which is closest to choice A, 7.53%.

A 5-Year Bond with 10% Coupon Rate and $1,000 Face