Suppose that a bond with a face value of $10,000 and coupon rate of 7% matures a year from now. It is selling for $9,880. What interest rate would make a person indifferent between the selling price of $9,880 and the bond payment (face value and coupon) one year from now?

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Quizplus · Accepted Answer

The interest rate that would make a person indifferent is found by solving for the yield to maturity (YTM), which equates the present value of the bond's future cash flows (coupon and face value) to its current price. The formula is: $9,880 = \frac{10,700}{(1 + r)}$, where $10,700 is the sum of the $10,000 face value and the $700 coupon payment. Solving for $r$ gives an interest rate of approximately 8.3%.

Suppose That a Bond with a Face Value of $10,000