Alice Trang is planning to buy a six-year bond that pays a coupon of 10 percent semiannually. Given the current price of $878.21, what is the yield to maturity on these bonds? (Round to the closest answer.)

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) is the rate of return an investor can expect if they hold the bond until maturity and reinvest all coupon payments at the same rate. To calculate YTM, we need to use trial and error or a financial calculator. Using a financial calculator, input the following: N = 12 (since there are 6 years with semiannual payments), I/Y = ?, PMT = 5% x 1000 (since the coupon rate is 10% semiannually and the face value is $1000), FV = 1000, and PV = -878.21 (the current price of the bond, negative because it represents an outflow). Solving for I/Y gives us 6.51%, which must be doubled since it is a semiannual rate to get an annual yield of 13.02%, or rounded to the nearest whole number, 13%. Therefore, the correct answer is C) 13%.

Alice Trang Is Planning to Buy a Six-Year Bond That