What is the yield to maturity of a five-year, $5 000 bond with a 4.5% coupon rate and semi-annual coupons if this bond is currently trading for a price of $4 876?

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) of a bond is the internal rate of return (IRR) if the bond is held until maturity, considering all its payments (coupons) and its final redemption value. The YTM can be found using financial calculators or spreadsheet software by inputting the current price, payment (coupon), face value, and number of periods. In this case, with a bond trading below its face value (a discount), the YTM will be higher than the coupon rate. The correct YTM is 5.07%, indicating that when you account for the bond's discounted price, the effective yield is higher than the coupon rate, reflecting the bond's total earnings if held to maturity.

What Is the Yield to Maturity of a Five-Year, $5