Question

Fred Salmon purchased six $1,000 bonds at 92. The bonds pay 6.5%. What was the cost of the bonds? What was the total annual interest? What is the yield?

Answer 1

Cost:$ 920 each or $5,520

Total annual interest: $65 per bond and $390 total

Yield: 7.06%

Explanation:

The cost of the bonds is given by the multiplication of the value of the bonds by 92 and divided by 100:

1000*92/100=920

So the cost of each bond would be $920

Then the interest that is payed by the bonds is based on its value which is $1000, so he receives 65 dollars per bond a year, that multiplied by the 6 bonds is equal to $390.

The yield is the real money paid to return interest rate relation, so you just have to take the percentage if 5,520 is the 100, how much is $390=

5520/100=390/x

x=39000/5520=7.06%

Answer 2

What is the cost of the bond?
When you see that a bond was purchased "at 92", this means that the bond was purchased for 92% of the face value. Sometimes the bond purchaser will pay more than the face value (purchased a number greater than 100), generally if the interest rate is higher than the market rate.

The cost of one bond, then, is 92% of 1,000, or $920.
Since there are 6 bonds, the total cost is 920 x 6 = $5520

What is the total annual interest?
The annual interest is the interest rate on the bond times the face value (not the cost of the bond).
The interest rate is 6.5%, so the annual interest on one bond is:
6.5% x 1000 = $65
6 bonds: $65 x 6 = $390

When we think of yield, we want to consider the real return on the bond. This is the annual interest earned divided by what the purchaser paid for it.
The purchaser paid $5520 for the bonds, and is earning $390.
390 ÷ 5520 = 7.06%.
Note that we can also calculate the return on one bond, rather than the total cost and interest of 6 bonds, and get the same result.
65 ÷ 920 = 7.06%