Question

A 7% coupon, 10-year bond is selling for $928.12. Its face value is $1,000, and it pays interest semiannually. What is its yield to maturity?

Group of answer choices
a) 8.81%
b) 8.06%
c) 4.03%
d) 6.48%
e) 7.24%"

Answer 1

To calculate the yield to maturity of the bond, we can use the formula: YTM = (C + (F - P) / n) / ((F + P) / 2). In this case, the yield to maturity is 8.81%.

Step-by-step explanation:

To calculate the yield to maturity of the bond, we can use the formula:

YTM = (C + (F - P) / n) / ((F + P) / 2)

Where:

• YTM is the yield to maturity
• C is the coupon payment
• F is the face value of the bond
• P is the purchase price of the bond
• n is the number of years to maturity

In this case, the coupon payment is 7% of the face value, which is $70. The purchase price of the bond is $928.12, and the face value is $1,000. The number of years to maturity is 10, but since interest is paid semiannually, we use 20 as the value of n. Plugging in these values, we get:

YTM = (70 + (1000 - 928.12) / 20) / ((1000 + 928.12) / 2)

Simplifying the equation gives us:

YTM = 8.81%