You are considering the purchase of Hytec bonds that were issued 14 years ago. When the bonds were originally sold, they had a 30-year maturity and a 14.375% coupon interest rate that is payable semiannually. The bond is currently selling for $1,508.72. What is the yield to maturity on the bonds?

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) on a bond is the interest rate that equates the present value of all future cash flows from the bond (coupon payments and principal repayment) with its current price. Given that the bond's price is above its par value, we can infer that the current interest rate environment is lower than when the bond was issued, hence the YTM must be lower than the original coupon rate of 14.375%. Among the given options, 8.50% is the only rate that is lower than the original coupon rate and plausible given the bond's premium price, indicating that investors require less return for holding the bond now compared to when it was issued.

You Are Considering the Purchase of Hytec Bonds That Were