What is the yield to maturity of a $1,000 bond with 14 years to maturity, a coupon rate of 8 percent? The bond is currently quoted at a price of 101.0625 and it pays interest semiannually.

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) of a bond is the internal rate of return (IRR) if the bond is held until maturity, considering all coupon payments and the principal repayment, discounted at the YTM rate. For bonds that pay semiannually, the quoted YTM needs to be adjusted to reflect the semiannual payment. The correct YTM can be found using a financial calculator or spreadsheet by inputting the current price, the coupon payment (half of 8% of $1000 = $40 semiannually), the number of periods (14 years * 2 = 28 periods), and the face value ($1000), and solving for the yield, which is then annualized. The correct answer, 7.87%, reflects the closest approximation to the actual calculation for this bond's YTM, considering it is quoted at a slight premium (101.0625% of par value) and pays interest semiannually.

What Is the Yield to Maturity of a $1,000 Bond