Assume you're contemplating the purchase of a $1,000,5% annual coupon income bond with 10 years remaining to maturity and that the bond currently is trading at $925.The approximate yield to maturity on this bond will be

Question

Quizplus · Accepted Answer

The yield to maturity on a bond is the rate of return that would be earned if the bond is held until maturity. In this case, the bond has 10 years remaining to maturity and has a $1,000 face value with a 5% annual coupon rate. The bond is currently trading at $925.

Using a financial calculator, we can find that the yield to maturity on this bond is approximately 6.0%. This is calculated by solving for the interest rate in the following equation:

$925 = $50 x (1 - (1 + r)^-10) / r + $1,000 / (1 + r)^10

where r is the annual yield to maturity.

Therefore, the best choice is C) 6.0%, as this is the approximate yield to maturity on the bond.

Assume You're Contemplating the Purchase of a $1,000,5% Annual Coupon