The Johnson National Bank has purchased a bond that has a coupon rate of 5.5% and a face value of $1000.It has 4 years to maturity and is selling in the market for $917.The bond makes annual coupon payments.What is the yield-to-maturity on this bond?

Question

Quizplus · Accepted Answer

To calculate the yield-to-maturity (YTM), we need to use the formula:

P = C/(1+r)^1 + C/(1+r)^2 + ... + C/(1+r)^n + F/(1+r)^n

Where:
P = price of the bond
C = coupon payment
r = YTM
n = number of periods
F = face value

Plugging in the values given,
917 = 55/(1+r)^1 + 55/(1+r)^2 + 55/(1+r)^3 + 55/(1+r)^4 + 1000/(1+r)^4

Solving for r using trial and error or by using financial calculator or excel spreadsheet, the YTM comes out to be approximately 8%. Therefore, the correct answer is D) 8%.

The Johnson National Bank Has Purchased a Bond That Has