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Andrew [12]
3 years ago
11

What is the expected rate of return on a bond that pays a coupon rate of 9% paid semi - annually, has a par value of $1,000, mat

ures in five years, and is currently selling for $1071? a. 8.40% b. 7.28% c. 3.64% d. 4.21%
Business
1 answer:
spayn [35]3 years ago
8 0

Answer:

b. 7.28%

Explanation:

This question is asking for the yield to maturity(YTM) of the bond. You can solve this using a financial calculator with the inputs below. Additionally, adjust the coupon payment(PMT) and time to maturity(N) to semiannual basis.

Time to maturity; N = 5*2 = 10

Face value; FV = 1000

Price of bond; PV = -1071

Semiannual coupon payment; PMT = (9%/2) *1000 = 45

then compute semiannual interest rate; CPT I/Y = 3.64%

Next, convert the semiannual rate to annual rate(YTM) = 3.64% *2

YTM = 7.28%

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