What is the expected rate of return on a bond that pays a coupon rate of 9% paid semi-annually, has a par value of $1,000, matures in five years, and is currently selling for $1071?

Question

Quizplus · Accepted Answer

First, calculate the annual coupon payment: 
9% * $1,000 = $90

Since the coupon is paid semi-annually, divide by 2 to get the semi-annual coupon payment: 
$90 / 2 = $45

Next, calculate the current yield: 
$45 / $1,071 = 0.042, or 4.2%

However, since the bond is selling at a premium (above par value), the yield to maturity will be lower than the current yield.

To calculate the yield to maturity, we need to use the financial calculator or Excel. The expected rate of return on this bond is calculated to be approximately 7.28%. Therefore, the best choice is A).

What Is the Expected Rate of Return on a Bond