A bond has eight years to maturity and a coupon rate of 6.5 percent.Coupon payments are made annually and the bond has a face value of $1,000.This bond is currently selling in the market for $862.What is the yield-to-maturity on this bond?

Question

Quizplus · Accepted Answer

To calculate yield-to-maturity, we need to find the discount rate that makes the present value of future cash flows, including the final principal payment, equal to the current market price of the bond. Using a financial calculator or Excel, we can solve for YTM by inputting the following values: PMT = $65 (=$1,000 x 6.5%), FV = $1,000, N = 8 years, and PV = -$862 (since we are buying the bond, the present value is negative). Solving for YTM gives us approximately 9%. Therefore, option D is the correct choice. Option A is incorrect because the coupon rate is not necessarily equal to the yield-to-maturity. Option B is too high based on the given information. Option C is too low based on the given information.

A Bond Has Eight Years to Maturity and a Coupon