Calculate the realized compound yield on a 5-year 7% bond (interest paid semiannually) now selling for 101?
A) 6.76%
B) 6.87%
C) 6.97%
D) 7.10%

Question

Quizplus · Accepted Answer

The realized compound yield, or yield to maturity (YTM), can be calculated using the bond price formula, considering the bond sells for $101, has a 5-year maturity, a 7% annual coupon rate (paid semiannually), and a $100 face value. The formula involves solving for the interest rate (i) that equates the present value of the bond's cash flows (coupon payments and face value repayment) to its current price. Given the complexity of solving the bond price formula directly for the yield (since it's an iterative process typically requiring financial calculators or software), the closest approximation given the options is 6.87%. This reflects the bond's yield considering its selling price is slightly above par, causing the yield to be slightly lower than the coupon rate.

Calculate the Realized Compound Yield on a 5-Year 7% Bond