Question

Ed Wood, a private investor, can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Mr. Wood's yield to maturity is ________ percent.

Answer 1

Answer:

Yield to maturity = 10.2020%

Explanation:

Given:

Face value of bond (f) = $1,000

Purchase price (p)= $980

Coupon rate = 10%

Number of year (n) = 20 year

Interest payment (c) = $1,000 × 10% = $100

Yield to maturity = ?

Computation of yield to maturity :

$Yield\ to\ maturity = \frac{c+\frac{f-p}{n} }{\frac{f+p}{2} }$

$Yield\ to\ maturity = \frac{100+\frac{1,000-980}{20} }{\frac{1,000+980}{2} }\\\\Yield\ to\ maturity = \frac{100+\frac{20}{20} }{\frac{1,980}{2} }\\\\Yield\ to\ maturity = \frac{100+1 }{990 }\\\\Yield\ to\ maturity = \frac{100+1 }{990 }\\\\Yield\ to\ maturity = 0.102020$

Yield to maturity = 0.102020

Yield to maturity = 10.2020%