Question

Your company's bonds are currently trading at 876.50. They mature in exactly 11 years and have a coupon of 36. What is the yield to maturity?

1) 5.08
2) 2.54
3) 4.50

Answer 1

To calculate the yield to maturity, multiply the face value of the bond by the coupon rate to find the annual interest payment. Then, determine the total cash flows from the bond by adding the annual interest payments for each year to the face value of the bond. Finally, calculate the yield to maturity using the cash flows and the current market price of the bond.

Step-by-step explanation:

Calculating Yield to Maturity

1. Calculate the annual interest payment by multiplying the face value of the bond ($1,000) by the coupon rate (8%). In this case, the annual interest payment is $80.
2. Calculate the total cash flows from the bond by adding the annual interest payments for each year to the face value of the bond. In this case, the cash flows for each year are: Year 1: $80 + $1,000 = $1,080, Year 2: $80 + $1,000 = $1,080, and so on.
3. Calculate the yield to maturity using the cash flows and the current market price of the bond. In this case, the yield to maturity is approximately 5.08%.

Therefore, the correct answer is option 1) 5.08%.