Question

Allen Stewart purchased a $2,000 bond at 110. The bond pays 6%.

What was the cost of the bond?

What was the annual interest?

What is the yield (to the nearest tenth of a percent)?

Answer 1

2000*110/100=2,200
2000*0.06=120
120/2200=0.0545×100=5.45%

Answer 2

Cost = $2200

Annual interest = $120

Yield=5.5%

Explanation:

Given: Face value= $2000 , purchasing price = $110, Interest rate = 6%

1) Cost of the bond :

The price of a bond is quoted as a percentage of par value (100).

A bond purchased at a price of 110 means that the cost is

`(2000*110)/(100)=2200`

2) Annual interest = face value × interest rate = 2000×0.06=120

3) Yield = Annual Interest / Cost =
`(120)/(2200)=0.054`= 5.45%

Nearest to tenth of percent Yield=5.5%