Final answer:
The estimated yield to maturity for a 4.20% bond trading at 91 with six years remaining to maturity is approximately 6.26%.
Step-by-step explanation:
To estimate the yield to maturity (YTM) on a 4.20% bond with 6 years to maturity, trading at a price of 91 (or $910 for a $1000 face value bond), we can use the method of averages. First, calculate the annual coupon payment by multiplying the coupon rate by the face value of the bond, which gives us $42 (4.20% of $1000). Since the bond is purchased for $910, the discount is $90 ($1000 - $910).
Over the remaining six years, this discount will provide an additional annual return, which is about $15 per year ($90 / 6 years). Adding the coupon payment and the average annual discount gives us $57 ($42 + $15) annual gain on an investment of $910.
To find the yield to maturity, divide the annual gain by the bond's current price:
$57 / $910 = 0.0626 or 6.26%. Therefore, the estimated yield to maturity is 6.26%.