A bond will pay $80 in interest at the end of each of the next three years, plus $1,000 at the end of the third year. If it has a present market price of $950, its yield-to-maturity is
A) 8.5%.
B) 9.4%.
C) 10%.
D) 10.5%.

Question

Quizplus · Accepted Answer

The yield-to-maturity (YTM) is the internal rate of return (IRR) for the bond, considering all cash flows (interest payments and the repayment of the principal) discounted back to their present value at the bond's current market price. Given the bond's cash flows ($80 per year for three years and an additional $1,000 at the end of the third year) and its current market price ($950), the YTM that equates the present value of these cash flows to the market price is approximately 10%. This calculation involves solving for the discount rate that makes the present value of the bond's future cash flows equal to its current price, which can be done using financial calculators or spreadsheet software.

A Bond Will Pay $80 in Interest at the End