Final answer:
The student's question involves calculating the yield to maturity of a bond, which is the total return expected if the bond is held until it matures. It includes periodic coupon payments and the face value at maturity compared to the current market price.
Step-by-step explanation:
The student is asking how to calculate the yield to maturity of a bond issued by Chronowerx Inc with a face value of $1000, a semi-annual 3% coupon rate, a maturity of four years, and a current market price of $895. The yield to maturity on a bond represents the total return an investor expects to receive if the bond is held until it matures.
To calculate the yield to maturity, one would typically use the formula that equates the present value of the bond's future cash flows (coupon payments and par value at maturity) to its current market price. This would involve an iterative process to solve for the yield since it's not a straightforward algebraic solution. However, software or financial calculators can handle this computation quickly.
To clarify with an example unrelated to the student's question, if an investor receives $1,000 face value plus $80 for the last year's interest payment, and the bond's purchase price was $964, then the yield on the bond would be (($1080 - $964)/$964) = 12%. The yield, or total return, includes interest payments and any capital gains due to the purchase price being less than face value.