Question

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________.

Answer 1

Answer:

Actual Yiel to maturity is 9.3%

Explanation:

Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity.

Face value = F = $1,000

Coupon payment = $1,000 x 4% = $40

Selling price = P = $785

Number of payment = n = 5 years

Yield to maturity = [ C + ( F - P ) / n ] / [ (F + P ) / 2 ]

Yield to maturity = [ $40 + ( $1,000 - $785 ) / 5 ] / [ ( 1,000 + $785 ) / 2 ]

Yield to maturity = [ $40 + $43 ] / $892.5  = $83 /$892.5 = 0.0645 = 0.093%