What is the yield to maturity of a ten-year,$1000 bond with a 5.2% coupon rate and semiannual coupons if this bond is currently trading for a price of $884?

Question

Quizplus · Accepted Answer

To calculate the yield to maturity of the bond, we need to use the bond pricing formula:

Bond Price = (Coupon Payment / (1 + Yield)^1) + (Coupon Payment / (1 + Yield)^2) + ... + (Coupon Payment + Face Value / (1 + Yield)^N)

where:
Coupon Payment = $1000 x 5.2% / 2 = $26
Face Value = $1000
N = 10 x 2 = 20 (since there are semiannual coupon payments over 10 years)

Plugging in the given values:

$884 = ($26 / (1 + Yield)^1) + ($26 / (1 + Yield)^2) + ... + ($26 + $1000) / (1 + Yield)^20

We need to solve for Yield, which we can do using a financial calculator or Excel. The answer we get is approximately 6.82%, which is choice (C).

What Is the Yield to Maturity of a Ten-Year,$1000 Bond