The current market price of Smith Corporation's 10 percent, 10-year bonds is $1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000. What is the yield to maturity (YTM), (stated on a simple, or annual, basis) if the bonds mature 10 years from today? (Round the answer to the nearest whole number.)

Question

Quizplus · Accepted Answer

To solve for the YTM, we need to use the bond pricing formula:

PV = C/2 * [1 - 1/(1+r/2)^n] / (r/2) + FV / (1+r/2)^n

Where PV is the bond price, C is the semiannual coupon payment, r is the YTM, FV is the face value, and n is the number of periods.

Plugging in the given values, we get:

1,297.58 = 50 * [1 - 1/(1+r/2)^20] / (r/2) + 1,000 / (1+r/2)^20

Solving this equation for r using a financial calculator or spreadsheet software, we get a YTM of 5.88%, which rounds to 6%. Therefore, the best choice is B.

The Current Market Price of Smith Corporation's 10 Percent, 10-Year