What is the yield to maturity on a $1,000 par value 93/4% bond purchased for $1,125? Assume the coupon is paid annually and the maturity is 12 years.

Question

Quizplus · Accepted Answer

Step 1: Calculate the annual coupon payment using the formula:
Annual coupon payment = Coupon rate x Par value = 9.375% x $1,000 = $93.75
Step 2: Calculate the annual yield using the formula:
Yield = Annual coupon payment ÷ Purchase price x 100% = $93.75 ÷ $1,125 x 100% = 8.33%
Step 3: Use a financial calculator or Excel to find the Yield to Maturity (YTM) using the bond's cash flows and the market price. The YTM is the rate of return that makes the present value of the bond's cash flows equal to the market price ($1,125).
YTM = 8.08%
Since the YTM is lower than the annual yield calculated in step 2, the bond is selling at a premium, meaning the market price is higher than the bond's par value.

What Is the Yield to Maturity on a $1,000 Par