What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that matures in 6 years and pays 12 percent interest annually?

Question

Quizplus · Accepted Answer

To calculate yield to maturity, we need to use the following formula:

P = C/(1+i)^1 +C/(1+i)^2+...+ C/(1+i)^n + M/(1+i)^n

where:
P = market price of the bond
C = annual coupon payment
i = yield to maturity
n = number of years to maturity
M = par value of the bond

Plugging in the given values:
P = $1,120
C = $120 (12% of $1,000)
n = 6
M = $1,000

$1,120 = $120/(1+i)^1 + $120/(1+i)^2 + $120/(1+i)^3 + $120/(1+i)^4 + $120/(1+i)^5 + $120/(1+i)^6 + $1,000/(1+i)^6

Using a financial calculator or a spreadsheet, we can solve for i to get:

i = 9.4%

Therefore, the approximate yield to maturity for the bond is 9.4%, which corresponds to choice (B).

What Is the Approximate Yield to Maturity for a $1,000