Question

Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon rate of 15%. What is it yielding (yield to maturity) if it is selling currently for $938.81?

Answer 1

The yield to maturity of a bond can be calculated using a formula. In this case, the bond's yield to maturity can be calculated as (Annual Interest Payment + (Face Value – Current Price) / Years to Maturity) / ((Face Value + Current Price) / 2).

Step-by-step explanation:

The yield to maturity of a bond can be calculated using the following formula:

Yield to Maturity = (Annual Interest Payment + (Face Value – Current Price) / Years to Maturity) / ((Face Value + Current Price) / 2)

In this case, the annual interest payment can be calculated as 15% of the face value, which is $150. The face value is $1,000, and the current price is $938.81. The bond has 30 years to maturity. Plugging these values into the formula:

Yield to Maturity = (150 + (1000 - 938.81) / 30) / ((1000 + 938.81) / 2)

Calculating this will give the yield to maturity of the bond, which represents the total return on the investment.