Question

A coupon bond with a face value of ​$1200 that pays an annual coupon of ​$100 has a coupon rate equal to nothing​%. ​(Round your response to the nearest whole​ number) What is the approximate​ (closest whole​ number) yield to maturity on a coupon bond that matures one year from​ today, has a par value of ​$1010​, pays an annual coupon of ​$70​, and whose price today is ​$1019.50​?

A. 6​%
B. 4​%
C. 5​%
D. 8​%
E. 7​%

If the yield to maturity on a bond exceeds its coupon​ rate, the price of the bond will be

above
equal
below

its face value.

Answer 1

Answer: 5.93% rounded to 6%, below

Explanation:

First step is understanding that you need to use a financial calculator. Using, for example, a BA II Plus Texas Instrument, press the number then press CPT at the top left corner of the calculator then either press:

N=maturity,

I/Y=yield to maturity,

PV=present value/price today

PMT=annual coupon

FV=future value/par value

Depending on the requirements of the question. For this question:

The "price today" is the present value of the bond which is $1019.50=PV

The par value is the amount paid back at the end of the period. This is the future value of the bond which is put in the calculator as "-$1010"=FV because it is a payment.

The annual coupon is the amount that is paid each year. It is put as "-$70"=PMT in the financial calculator.

The maturity date is the year the bond expires so if it says "one year from today", this is 1=N

Then, after following the sequence of inputs into the calculator, the missing number is the yield to maturity will be calculated by pressing CPT then I/Y. The answer should come out as 5.93%. This is the return that the company that received the bond expects to make during the period.

If the Yield to maturity on a bond exceeds its coupon rate, the price of the bond will be below its face value.