Final answer:
The yield-to-maturity can be calculated based on the annual coupon payments, face value, current price, and remaining years, representing the return an investor receives by holding the bond until maturity. It includes interest payments and price adjustments due to market interest rate changes. The correct answer is option D) 7.92%.
Step-by-step explanation:
The student has asked how to determine the yield-to-maturity on a bond. Five years ago, Blue Ltd sold a $1000 par value bond, which had an original maturity of 13 years and a coupon rate of 10%. Today, these bonds are selling for $1,120. To find the yield-to-maturity, one must consider the annual coupon payments, face value, current price, and remaining years until maturity.
The bond's yield-to-maturity represents the return an investor would receive if they held the bond until it matured, considering that both the regular interest payments and the adjustment in the bond's price are factored in.
The coupon rate does not change; it remains at the bond's original rate. When interest rates rise, bonds sell for less than face value, and conversely, when rates fall, they sell for more.
Therefore, the correct answer is D) 7.92%.