You are considering the purchase of an AT&P bond with a 13% coupon rate. Interest is paid and compounded semiannually. The bond will mature in 8 years, and has a $1,000 face value. The bond currently sells for $867. Calculate the ANNUAL yield to maturity for this bond. (Round to nearest percentage)

Question

Quizplus · Accepted Answer

To calculate the yield to maturity, we need to use the following formula:

P=D/(1+r)^1 + D/(1+r)^2 + ... + D/(1+r)^n + F/(1+r)^n

Where:
P = market price of the bond
D = semiannual coupon payment
r = annual interest rate (yield to maturity)
n = number of semiannual periods (in this case, 8 years * 2 = 16 semiannual periods)
F = face value of the bond

Plugging in the numbers, we get:

867 = 65/(1+r)^1 + 65/(1+r)^2 + ... + 65/(1+r)^16 + 1000/(1+r)^16

Using a financial calculator or spreadsheet software to solve for r, we get an annual yield to maturity of approximately 16%. Therefore, the best choice is C.

You Are Considering the Purchase of an AT&P Bond with a 13