Final answer:
The yield to maturity of a $10,000 face-value discount bond selling for $5,000 and maturing in one year is 100 percent. It represents the total profit as a percentage of the initial investment, excluding other factors like market interest rates changes and bond's risk.
Step-by-step explanation:
To calculate the yield to maturity (YTM) of a discount bond, we need to consider the total returns the bond will generate. In this scenario, a $10,000 face-value bond is selling for $5,000 and will mature in one year. The investor will receive the face value of the bond upon maturity, which is $10,000. Hence, the profit on this bond will be the difference between the face value and the purchase price, which is $10,000 - $5,000 = $5,000.
To find the yield to maturity, we calculate the percentage increase over the initial investment. The calculation is as follows: ($5,000 profit / $5,000 initial investment) * 100, which equals 100 percent. Therefore, the yield to maturity on this bond is 100 percent, assuming that there is no risk and the bond will indeed pay out the face value at maturity.
It is important to note that in a real-world scenario, bond prices are affected by many factors, including prevailing interest rates and the bond's risk. In the case of risk-free bonds, the market interest rates significantly influence bond pricing. If interest rates increase in the economy, the price of existing bonds with lower interest rates will decrease, making them less attractive investments compared to new bonds with higher rates. Conversely, if market rates decrease, existing bonds with higher rates become more valuable, often selling for more than their face value.