A bond is currently priced at $800 on a par value of $1,000.Its term to maturity is 10 years and its coupon rate is 10% (stated annually,paid semiannually).If you buy the bond,and hold it to maturity,what would be the yield to maturity?

Question

Quizplus · Accepted Answer

To calculate the yield to maturity (YTM) of the bond we need to use the following formula:

YTM = (C + (F - P) / n) / ((F + P) / 2)

where 
C = coupon payment per period
F = face value of the bond (par value)
P = current market price of the bond
n = number of periods

In this case, 
C = 10% / 2 = $50 (semiannual coupon payment)
F = $1,000
P = $800
n = 10 * 2 = 20 (number of semiannual periods)

Plugging these values into the formula:

YTM = (50 + (1000 - 800)/20) / ((1000 + 800)/2) = 0.1381 or 13.81%

Therefore, the correct answer is C.

A Bond Is Currently Priced at $800 on a Par