Suppose an investor purchases a one-year bond today, for $960.The bond promises a return of $1,000.She purchases another one-year bond, after a year, for $887 that promises a return of $990.What is the yield to maturity earned by the investor on the purchase of these two shortterm bonds?

Question

Suppose an investor purchases a one-year bond today, for $960.The bond promises a return of $1,000.She purchases another one-year bond, after a year, for $887 that promises a return of $990.What is the yield to maturity earned by the investor on the purchase of these two short­term bonds?​

Quizplus · Accepted Answer

To calculate yield to maturity, we need to use the formula: 
Yield to Maturity = [(Future Value/Present Value)^(1/n)] - 1, where n is the number of years.

For the first bond, the yield to maturity is: 
YTM = [(1000/960)^(1/1)] - 1 = 4.17%

For the second bond, the yield to maturity is: 
YTM = [(990/887)^(1/1)] - 1 = 11.63%

To calculate the overall yield to maturity on these two investments, we can use the average of these two yields: 
YTM = (4.17% + 11.63%)/2 = 7.85%

Therefore, the answer is B) 7.85 percent.

Suppose an Investor Purchases a One-Year Bond Today, for $960