CUP Company 8% bonds are currently selling for $950. These bonds (par value of $1,000) mature in one year and pay interest annually. Determine the yield to maturity (to the nearest tenth of 1 percent) on this bond issue.

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) on a bond is the total return anticipated on a bond if the bond is held until it matures. For the CUP Company 8% bond selling for $950 with a par value of $1,000 maturing in one year, the YTM can be calculated as follows: The bond will pay $80 in interest (8% of $1,000) and will mature at $1,000, providing a total return of $130 ($1,000 - $950 + $80). The YTM is the total return ($130) divided by the current price ($950), which equals 13.7% when expressed as a percentage.

CUP Company 8% Bonds Are Currently Selling for $950