Mugwump Industries has issued a bond which has a $1,000 par value and a 15 percent annual coupon interest rate. The bond will mature in ten years and currently sells for $1,250. Using the approximation formula to calculate the yield to maturity (YTM) of this bond results in a YTM of

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) can be approximated using the formula: YTM ≈ [(Annual Interest Payment) + ((Par Value - Current Price) / Years to Maturity)] / [(Par Value + Current Price) / 2]. Plugging in the values: YTM ≈ [150 + ((1000 - 1250) / 10)] / [(1000 + 1250) / 2] = 11.11%.

Mugwump Industries Has Issued a Bond Which Has a $1,000