Jane Almeda is interested in a 10-year bond issued by Roberts Corp. that pays a coupon of 10 percent annually. The current price of this bond is $1,174.45. What is the yield that Jane would earn by buying it at this price and holding it to maturity? (Round to the closest answer.)

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) can be found using the formula for the present value of a bond, which equates the current price of the bond to the sum of the present value of its future cash flows (coupon payments) and the present value of its face value (assuming $1,000, which is standard for bonds unless stated otherwise). Given the annual coupon rate of 10% on a $1,000 face value bond, the annual coupon payment is $100. The bond is being sold for $1,174.45, and it has 10 years until maturity. Solving for the YTM involves finding the discount rate that equates the bond's price with the present value of its cash flows. This calculation can be complex and typically requires a financial calculator or spreadsheet software. The correct YTM, given the options, is approximately 7.5%, which means that if Jane buys the bond at this price and holds it to maturity, she would earn an annual yield of 7.5%.

Jane Almeda Is Interested in a 10-Year Bond Issued by Roberts