15-69 What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling at 25 cents on the dollar?

Question

Quizplus · Accepted Answer

The coupon payment on the bond is calculated as 10% of the face value, which is $1000 (assuming standard par value). So, the annual coupon payment is $100.

Since the bond is selling at 25 cents on the dollar, it means the market price is only 25% of the face value. Therefore, the market price is $250 ($1000 x 0.25).

The yield on the bond can be calculated as the annual coupon payment divided by the market price. 
Yield = ($100 / $250) x 100% = 40%

So, the approximate yield on the bond is 40%, which is option B.

15-69 What Is the Approximate Yield on a 20-Year 10