Risky Inc.issued a bond 5 years ago with a term to maturity of 10 years.The bond pays a coupon of 12% (stated annually,paid semiannually).It Risky Inc.'s bond is currently priced at $842,what is this bond's yield to maturity?

Question

Quizplus · Accepted Answer

We can solve for the bond's yield to maturity by using the following formula:

P = (C / (1 + r/2)^n) * (1 - 1 / (1 + r/2)^m) + F / (1 + r/2)^n

Where:
P = bond price ($842)
C = coupon payment ($60, calculated as 12% * $1,000 / 2)
r = yield to maturity (unknown)
n = total number of semiannual periods until maturity (20)
m = number of semiannual periods already passed (10)
F = face value ($1,000)

Plugging in the values and solving for r, we get:

842 = (60 / (1 + r/2)^20) * (1 - 1 / (1 + r/2)^10) + 1000 / (1 + r/2)^20
r = 16.79%

Therefore, the bond's yield to maturity is 16.79%, which corresponds to answer choice B.

Risky Incissued a Bond 5 Years Ago with a Term to to Maturity