What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling at 25 cents on the dollar? (choose the closest answer)

Question

Quizplus · Accepted Answer

The bond is selling at 25 cents on the dollar, which means it is selling at a significant discount. Therefore, the yield will be higher than the coupon rate of 10%. To calculate the yield, we can use the formula: Yield = (Annual Coupon Payment / Current Market Price) * 100%.

The annual coupon payment is 10% of the face value, which is $100, so it is $10.

The current market price is 25% of the face value or $25.

Therefore, the yield is ($10/$25)*100% = 40%.

The closest answer choice is (B).

What Is the Approximate Yield on a 20-Year 10 Percent