A $1,000 face value bond has a coupon rate of 7 percent, a market price of $989.40, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.2 percent, what is the yield to maturity when expressed in real terms?

Question

Quizplus · Accepted Answer

The correct answer is D.The real yield to maturity is the nominal yield to maturity minus the expected inflation rate. The nominal yield to maturity is the annual coupon payment plus the capital gain divided by the market price. The annual coupon payment is $1,000 * 7% / 2 = $35. The capital gain is $1,000 - $989.40 = $10.60. The nominal yield to maturity is ($35 + $10.60) / $989.40 = 4.68%. The real yield to maturity is 4.68% - 2.2% = 4.84%.

A $1,000 Face Value Bond Has a Coupon Rate of 7