Question

What is yield to maturity on a bond with the following characteristics- Coupon Rate of 10%, paid semi annually, current price of $920 per $1,000, 5 years until maturity.

Answer 1

The yield to maturity on the bond is approximately 12%.

Step-by-step explanation:

For a premium bond, the correct choice is (e) the coupon rate exceeds both the yield to maturity and the current yield.

The yield to maturity on a bond with the given characteristics can be calculated using the following steps:

1. Calculate the present value of the future cash flow from the bond. In this case, the annual coupon payment is $100 (10% of $1,000) and it is paid semiannually. The bond has 5 years until maturity, so there will be 10 coupon payments.
2. Calculate the present value of the face value payment at maturity. In this case, the face value is $1,000.
3. Add the present values of the coupon payments and the face value payment to get the total present value.
4. Use the total present value to calculate the yield to maturity using trial and error or a financial calculator.

In this case, the yield to maturity on the bond is approximately 12%.