Question

Ralph purchased his first Series EE bond during the year. He paid 709 for a 10 year bond with a1,000 maturity value. The YtM on the bonds was 3.5. What is the yield to maturity (YTM) on the bond?

Answer 1

The yield to maturity (YTM) on the bond is 52.4%.

Step-by-step explanation:

The yield to maturity (YTM) on the bond can be calculated as follows:

1. Consider the investor receiving the $1,000 face value of the bond, plus $80 for the last year's interest payment.
2. Calculate the yield by deducting the purchase price of the bond ($709) from the total amount received at maturity ($1,080), and dividing that by the purchase price.
3. In this case, the yield to maturity on the bond is ($1,080 - $709) / $709 = 52.4%.

This means that the bond is expected to yield a return of 52.4% over its ten-year term. It's important to note that the YTM takes into account both interest payments and any capital gains or losses.