A newly issued bond with a face value of $12,000 and no coupon payments is priced at $9,000.The bond will mature in one year.What is the yield on this bond?

Question

Quizplus · Accepted Answer

Since the bond has no coupon payments, the only cash flow occurs at maturity, when the investor will receive the face value of $12,000. The price of $9,000 is the present value of this future cash flow. Using the formula for yield-to-maturity, we have:

$9,000 = $12,000/(1 + r)
1 + r = $12,000/$9,000
1 + r = 4/3
r = 1/3 or 33.3%

Therefore, the yield on this bond is 33.3%.

A Newly Issued Bond with a Face Value of $12,000