What is the expected rate of return on a bond that matures in seven years,has a par value of $1,000,a coupon rate of 14%,and is currently selling for $911? Round your answer to the nearest whole percent and assume annual coupon payments.

Question

Quizplus · Accepted Answer

To calculate the expected rate of return, we need to use the formula for yield to maturity (YTM). YTM is the total return anticipated on a bond if the bond is held until it matures, and it takes into account the bond's current market price, its par value, its coupon interest rate, and the time to maturity. Using a financial calculator or Excel, we can find that the YTM of the bond is approximately 16.03%.

Since the coupon rate is higher than the YTM, the bond is selling at a discount. Therefore, the expected rate of return is higher than the coupon rate. Hence, the closest whole percent to the YTM of 16.03% is 16%. Thus, the best choice is D as it is the closest option to the expected rate of return.

What Is the Expected Rate of Return on a Bond