If a bond with one year maturity with a coupon rate of 5% and face value of $1,000 is selling for $881.94. Calculate the promised yield on the bond.

Question

Quizplus · Accepted Answer

The promised yield on the bond is the rate of return that the investor will earn if they buy the bond at its current market price. To calculate the promised yield, we need to use the formula:
Promised yield = (coupon payment + (face value - market price))/market price

We know the coupon rate is 5%, which means the bond will pay a coupon payment of $50 (5% of $1,000 face value). We also know that the market price of the bond is $881.94.

Using the formula, we get: 
Promised yield = ($50 + ($1,000 - $881.94))/$881.94 = 19.06%

Therefore, the correct answer is C, 19.06%.

If a Bond with One Year Maturity with a Coupon