The yield to maturity of a one-year,simple loan of $400 that requires an interest payment of $50 is
A) 5 percent.
B) 8 percent.
C) 12 percent.
D) 12.5 percent.

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) is the rate of return that an investor would receive if they held the investment until maturity and received all interest payments and the principal repayment.

In this case, we can calculate the YTM as follows:

- The interest payment is $50, which represents the cash flow that the investor will receive at the end of the year. 
- The initial loan amount (or principal) is $400.

Using a financial calculator or spreadsheet, we can solve for the YTM that would make the present value of these cash flows equal to the initial loan amount:

PV = -$400 
PMT = $50 
FV = $0 
N = 1

Solving for I/Y, we get:

I/Y = 12.49%

Therefore, the YTM of this loan is 12.5 percent, which is closest to answer choice D.

The Yield to Maturity of a One-Year,simple Loan of $400