Question

You know that the yield on a bond priced at $1,056.70 is now 3.24%. It has a coupon of $40. Given this info, how many years until this bond matures?

1) 9 years
2) 18 years
3) 3 years

Answer 1

Given the bond price of $1,056.70, a coupon of $40, and a yield of 3.24%, we calculate the number of years until maturity, which is closest to 9 years. This is determined by dividing the coupon payment by the difference between the price and the face value to match the yield.

Step-by-step explanation:

Calculating Bond Maturity

To determine the number of years until a bond matures when given its price, coupon, and yield, one can use a financial formula or a financial calculator. Given the information that a bond is priced at $1,056.70 with a yield of 3.24% and a coupon of $40, we need to solve for the time to maturity. The bond's face value is typically $1,000 unless stated otherwise.

Using the provided info, we know the annual payment to the investor is the coupon of $40. Given the current price of $1,056.70 and a yield of 3.24%, we can calculate the number of years until maturity using the following relationship:

Coupon payment / (Price - Face value) = Yield / 100

Let's isolate the time to maturity in that equation:

$40 / ($1,056.70 - $1,000) = 3.24% / 100 = 0.0324

This calculation will give us the number of years until the bond matures. After performing the calculation, we find that the time to maturity closely matches one of the options provided, which is 9 years. Hence, the correct option in the final answer is 1) 9 years.