Question

Claribel has a $500 bond with a 4% coupon. Claribel purchased this bond for

Answer 1

Answer:

The yield of this new bond is approx 3.8%.

Step-by-step explanation:

Given : Claribel has a $500 bond with a 4% coupon. Claribel purchased this bond for  $525.

To find : What is the yield of this new bond?

Solution :

As coupon is  4 % , a  $ 500  bond earns  is given by,

$4\% \text{ of } 500= 0.04\times 500= 20$

A  $ 500  bond earns $ 20  in a year.

Now as market price of bond is  $ 525 , but it earns  $ 20

The rate of interest earned is

$\frac{20\times 100}{525}= \frac{80}{21}=3.81\%$

Therefore, the yield of this new bond is approx 3.8%.