Sentry Corp.bonds have an annual coupon payment of 7.25%.The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years.What is the yield to maturity on these bonds?

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) on a bond is the internal rate of return (IRR) for an investor if the bond is held until maturity, assuming that all payments are made as scheduled. The YTM can be calculated using the formula for the present value of a bond, which equates the present value of the bond's future cash flows (coupon payments and the repayment of the par value at maturity) to its current price. Given the annual coupon payment of 7.25% of the par value ($1,000), which equals $72.50, a current price of $1,125, and a maturity of 13 years, the YTM can be found by solving the bond pricing formula for the discount rate (YTM) that makes the present value of the bond's cash flows equal to its current price. The correct answer, 5.85%, is obtained through this calculation, indicating that if an investor buys the bond at $1,125 and holds it until maturity, they can expect to earn an annual return of 5.85%.