What is the yield-to-maturity of a $1,000, 6% semi-annual coupon bond that matures in 6 years and currently sells for $966.66?

Question

Quizplus · Accepted Answer

The yield-to-maturity (YTM) for a bond is the internal rate of return (IRR) for an investor if the bond is held until maturity, assuming that all coupon and principal payments are made as expected. The YTM can be found using the formula for the present value of a bond, which equates the current price of the bond to the present value of its future cash flows (coupons and principal repayment). The calculation involves solving for the interest rate (YTM) that equates the bond's price to the present value of its cash flows. Given the semi-annual coupon payments, the YTM calculation must account for the semi-annual compounding. In this case, the correct YTM is 6.68%, which reflects the semi-annual compounding nature of the bond's coupons and its current discount to face value.

What Is the Yield-To-Maturity of a $1,000, 6% Semi-Annual Coupon