The 7 percent annual coupon bonds of IPO,Inc.are selling for $1,021.The bonds have a face value of $1,000 and mature in seven years.What is the yield to maturity?

Question

Quizplus · Accepted Answer

To calculate the yield to maturity, we need to use trial and error or a financial calculator. Using trial and error, we can start with a guess of, say, 5%, and calculate the bond price using the present value formula. If the calculated bond price is higher than the market price of $1,021, we need to try a higher interest rate. If the calculated bond price is lower than $1,021, we need to try a lower interest rate. We repeat this process until we find the interest rate that makes the calculated bond price closest to the market price of $1,021.

Using a financial calculator, we can enter the following information:

N = 7 (number of years to maturity)
I/Y = ? (yield to maturity)
PMT = 70 (annual coupon payment = 7% x $1,000 face value)
FV = 1,000 (face value at maturity)
PV = -1,021 (market price of the bond)

Solving for I/Y, we get:

I/Y = 6.62 percent

Therefore, the yield to maturity is 6.62 percent, which is closest to choice (B).

The 7 Percent Annual Coupon Bonds of IPO,Inc