From his retirement fund, Jack buys a $50 000, 5.4% bond with quarterly interest coupons at 104.1, redeemable at par in 15 years. What is the approximate yield rate?

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Quizplus · Accepted Answer

The yield rate of a bond is calculated based on the interest payments, the purchase price, and the redemption value. In this case, Jack buys the bond at 104.1% of its par value ($50,000), meaning he pays $52,050 for it. The bond has a coupon rate of 5.4%, meaning it pays $2,700 in interest annually, or $675 quarterly. Since the bond is redeemable at par ($50,000) in 15 years, and considering the purchase price and the interest payments, the yield rate is closest to 5.024%, which accounts for the actual earnings rate considering the purchase price above par and the fixed interest payments.

From His Retirement Fund, Jack Buys a $50 000, 5