The yield to maturity for a bond with eight years to maturity,with a face value of $1,000,pays 10 percent annual coupon and currently sells for $1,950,is 5 percent.

Question

Quizplus · Accepted Answer

The yield to maturity formula for a bond can be written as:

YTM = [(Coupon payment + Face value) / Bond price]^(1/n) - 1

where:
- Coupon payment = annual coupon rate x face value
- Face value = $1,000
- Bond price = $1,950
- n = number of years to maturity

Using these values, we get:

YTM = [(0.1 x 1000 + 1000) / 1950]^(1/8) - 1
YTM = (1100 / 1950)^(1/8) - 1
YTM = 0.0469 or 4.69%

Therefore, the statement is false. The yield to maturity for the bond is approximately 4.69%, not 5%.

The Yield to Maturity for a Bond with Eight Years