Which of the following $1,000 face value bonds has a 10% yield, assuming semiannual coupon payments of 8%?
1)A 5 year maturity bond selling for $964.54
2)A 10 year maturity bond selling for $875.39
3)A 20 year maturity bond selling for $828.36

Question

Quizplus · Accepted Answer

To find which bond(s) have a 10% yield with semiannual coupon payments of 8%, we use the formula for the present value of a bond, which considers the present value of the coupon payments and the present value of the face value of the bond. The coupon payment is $1,000 * 8% / 2 = $40 per period. A 10% yield with semiannual payments means a 5% per period interest rate. 1) For the 5-year maturity bond, there are 10 periods. The present value calculation does not match the given price for a 10% yield.2) For the 10-year maturity bond, there are 20 periods. The price of $875.39 suggests a higher yield, which aligns with a 10% annual yield due to the lower price compared to its face value.3) For the 20-year maturity bond, there are 40 periods. The price of $828.36 also suggests a higher yield, aligning with a 10% annual yield due to the even lower price compared to its face value.Both the 10-year and 20-year bonds have prices that suggest a yield of 10% when considering the formula for bond pricing with semiannual coupon payments.

Which of the Following $1,000 Face Value Bonds Has a 10