Suppose you just purchased a corporate bond with a par value of $1,000 for $951.25.It carries a 7% coupon rate and will mature in 5 years.What is the yield to maturity?

Question

Quizplus · Accepted Answer

To find the yield to maturity, we need to use the following formula:

YTM = (C + (FV - PV) / n) / ((FV + PV) / 2)

Where
C = annual coupon payment = 7% of $1,000 = $70
FV = face value of the bond = $1,000
PV = purchase price of the bond = $951.25
n = number of years to maturity = 5

Substituting these values into the formula, we get:

YTM = (70 + (1,000 - 951.25) / 5) / ((1,000 + 951.25) / 2)
YTM = (70 + 9.75) / 975.63
YTM = 0.0803

Therefore, the yield to maturity is 8.03%, which is closest to option C) 8.23%.

Suppose You Just Purchased a Corporate Bond with a Par