Elizabeth Cherry has a bond that has 10 years to maturity, a face value of $1,000, an 8% interest rate, and a market price of $1,200. What is the yield-to-maturity on this bond?

Question

Quizplus · Accepted Answer

To calculate the yield-to-maturity on this bond, we need to use the formula:

PV = (C / y) x [1 - (1 / (1 + y)^n)] + F / (1 + y)^n

where PV is the present value or market price of the bond, C is the annual coupon payment, y is the yield-to-maturity (the unknown), n is the number of periods until maturity (in this case, 10 years), and F is the face value of the bond.

Plugging in the given values, we get:

1,200 = (80 / y) x [1 - (1 / (1 + y)^10)] + 1,000 / (1 + y)^10

Solving for y using trial and error or a financial calculator, we get a yield-to-maturity of approximately 5.46 percent, which corresponds to answer choice B.

Elizabeth Cherry Has a Bond That Has 10 Years to Maturity