Best Lodging has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in 5 years, and have a 6 percent coupon. The current price is quoted at 101. What is the yield to maturity?

Question

Quizplus · Accepted Answer

The yield to maturity is the annual rate of return an investor can expect to receive if they hold the bond until maturity. It is calculated using the following formula:YTM = (C + (FV - PV) / N) / ((FV + PV) / 2)where:C = the annual coupon paymentFV = the face value of the bondPV = the present value of the bondN = the number of years to maturityIn this case, the annual coupon payment is $60 (6% of $1,000), the face value of the bond is $1,000, the present value of the bond is $1,010, and the number of years to maturity is 5. Plugging these values into the formula, we get:YTM = (60 + (1,000 - 1,010) / 5) / ((1,000 + 1,010) / 2)= (60 - 2) / 1,005= 58 / 1,005= 0.0577= 5.77%Therefore, the yield to maturity is 5.77%.

Best Lodging Has $1,000 Face Value Bonds Outstanding