Final answer:
The yield of Crockett Corporation's 5-year bonds is 12%, which considers the $1,000 face value and $80 interest payment. It reflects total returns including both interest and capital gains and is influenced by market interest rates.
Step-by-step explanation:
The yield of Crockett Corporation's 5-year bonds is 12%. This yield is determined by considering that an investor will receive the $1,000 face value, plus $80 for the last year's interest payment. The calculation for yield is done by subtracting the purchase price of the bond from the sum of its face value and last interest payment, and then dividing it by the purchase price; in numerical terms, it is (($1080 - $964)/$964) = 12%. The yield represents the total return on the bond which includes both interest payments and capital gains.
It is essential to understand that the bond's coupon rate remains at 8% and does not affect this yield calculation. Bonds can sell for more or less than their face value depending on current interest rates. For instance, when interest rates rise, the value of pre-existing bonds with lower interest rates goes down, as they are less attractive to investors compared to new bonds with higher rates. Conversely, if the interest rates fall, older bonds with higher rates become more valuable and can be sold for more than their face value.