Final answer:
The YTM is the Yield to Maturity, which reflects the compound annual rate of return of a bond, accounting for its current price, coupon rate, and the time left until maturity. To find the YTM, one must utilize financial calculations that take into account the present value, future value, and coupon payments across the time periods remaining.
Step-by-step explanation:
The question asks to determine the Yield to Maturity (YTM) of a bond with specific characteristics. The YTM is the total return anticipated on a bond if the bond is held until it matures. It includes both annual interest payments and any gains or losses that occur when the bond is sold before it matures.
Given that the bond has a coupon rate of 6.5 percent with annual payments, sells for $960.11, matures in 21 years, and has a par value of $1,000, we can calculate the YTM. This requires a financial calculator or an excel sheet that supports the RATE function because the calculation involves solving for the interest rate of an annuity.
Calculation of the YTM involves the present value (current price of the bond), the number of time periods until maturity, the coupon payment, and the future value (par value). Using these inputs, we can solve for the YTM which reflects the compound annual rate of return for the bond given its current price and future cash flows.