Generic,Inc.has bonds outstanding that mature in 20 years.The bonds have $1,000 par value,pay interest annually at a rate of 10%,and have a current selling price of $875.25.The yield to maturity on the bonds is:

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. It takes into account not only the interest income but also the difference between the purchase price of the bond and the par value. To calculate YTM, we need to find the discount rate that makes the present value of future cash flows equal to the price of the bond.

Using a financial calculator, we can solve for YTM as follows: 
N = 20 (number of years to maturity)
I/Y = ? (YTM)
PV = -875.25 (negative because it represents the cash outflow at t = 0)
PMT = 100 (annual interest payment)
FV = 1000 (par value at maturity)
Solving for I/Y gives us 11.63%.

Therefore, the best choice is C) 11.63%.