If a $10,000 face-value discount bond maturing in one year is selling for $5,000,then its yield to maturity is
A)5 percent.
B)10 percent.
C)50 percent.
D)100 percent.

Question

Quizplus · Accepted Answer

The yield to maturity is the rate of return that would be realized if the bond were held to maturity and all interest and principal payments were made as scheduled. In this case, the bond is being sold at a discount ($5,000 < $10,000), which means the yield to maturity must be higher than the coupon rate. Since the bond is maturing in one year, the yield to maturity is simply the discount as a percentage of the face value: $5,000/$10,000 = 50% or 0.50 as a decimal. To convert to a percentage, we multiply by 100, so the yield to maturity is 100%. Therefore, the correct answer is D, 100 percent.

If a $10,000 Face-Value Discount Bond Maturing in One Year