A 10% coupon,annual payments,bond maturing in 10 years,is expected to make all coupon payments,but to pay only 50% of par value at maturity.What is the expected yield on this bond if the bond is purchased for $975?

Question

Quizplus · Accepted Answer

The expected yield is the annual coupon payment plus the expected capital gain or loss divided by the purchase price. The annual coupon payment is $100 (10% of $1,000). The expected capital gain or loss is -$500 (50% of $1,000 minus $975). The purchase price is $975. Therefore, the expected yield is ($100 - $500) / $975 = 6.68%.

A 10% Coupon,annual Payments,bond Maturing in 10 Years,is Expected to Make