Jenny LePlaz is looking to invest in a five-year bond that pays annual coupons of 6.25 percent and currently sells at $912.34. What is the current market yield on such bonds? (Round to the closest answer.)

Question

Quizplus · Accepted Answer

The current market yield or yield to maturity (YTM) of a bond can be found using the bond pricing formula, which equates the present value of the bond's future cash flows (coupon payments and the face value repayment at maturity) to its current price. Given the bond's annual coupon rate is 6.25%, its current price is $912.34, and it's a five-year bond, the yield that equates the bond's discounted future cash flows to its current price is approximately 8.5%. This involves solving for the yield in the bond pricing equation, which typically requires financial calculators or software, as it's a trial-and-error process. The correct answer is chosen based on the closest match to the calculated yield.

Jenny LePlaz Is Looking to Invest in a Five-Year Bond