Answer:
(a) 5.5%
Explanation:
Yield-to-maturity (YTM) is the discounting rate for calculating the present value of bond & coupon received.
Bond price = Present value of interest received + present value of bond
⇔ 1040 = 70/(1+ YTM)^3+70/(1+ YTM)^2+70/(1+ YTM) + 1000/(1+YTM)3
It's really difficult to solve above equalation, then we try every hint provived.
(a) 5.5% ->True
70/(1+ 5.5%)^3+70/(1+ 5.5%)^2+70/(1+ 5.5%) + 1000/(1+5.5%)^3 = 1040
(b) 4.9%
70/(1+ 4.9%)^3+70/(1+ 4.9%)^2+70/(1+ 4.9%) + 1000/(1+4.9%)^3 = 1057
(c) 6.4%
70/(1+ 6.4%)^3+70/(1+ 6.4%)^2+70/(1+ 6.4%) + 1000/(1+6.4%)^3 = 1016
(d) 6.8%
70/(1+ 6.8%)^3+70/(1+ 6.8%)^2+70/(1+ 6.8%) + 1000/(1+6.8%)^3 = 1005
(e) 7.4%.
70/(1+ 7.4%)^3+70/(1+ 7.4%)^2+70/(1+ 7.4%) + 1000/(1+7.4%)^3 = 990
