Suppose you purchased a $1000 par-value bond in 2003 for $650. Its stated interest rate is 6 percent and it matured in 2013. What was your yield?

Question

Quizplus · Accepted Answer

The bond was purchased for $650 and had a par value of $1000, so the initial yield would be: 
$60 / $1000 = 6%

However, the bond was purchased at a discount of $350 ($1000 - $650), so the actual yield would be higher. 
To calculate the yield, we can use the following formula: 
Yield = (Annual interest payment + [Par value - Purchase price] / Years held) / Purchase price

Annual interest payment = $60 (6% of $1000) 
Par value - Purchase price = $1000 - $650 = $350 
Years held = 10 (from 2003 to 2013)

Yield = ($60 + [$350 / 10]) / $650 = 0.0923 or 9.2%

Therefore, the answer is D) 9.2 percent.

Suppose You Purchased a $1000 Par-Value Bond in 2003 for $650