The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to maturity and a 9 percent coupon rate having a face value of $1,000.These bonds are selling in the market for $1,126.Coupon payments are made annually on this bond.
What is the yield to maturity on these bonds?
A)3 percent
B)6 percent
C)9 percent
D)12 percent
E)None of the options is correct.

Question

Quizplus · Accepted Answer

To calculate the yield to maturity, we need to find the interest rate that will make the present value of the bond's cash flows equal to its current market price. Using a financial calculator or spreadsheet function, we can solve for the interest rate (yield) that makes the following formula true:
$1,126 = $90/(1+yield)^1 + $90/(1+yield)^2 + ... + $1,090/(1+yield)^5
The yield to maturity on these bonds is approximately 6 percent.

The Arnold National Bank Has a Bond Portfolio That Consists