Final answer:
The yield to maturity of the bond is approximately 2.81%.
Step-by-step explanation:
The yield to maturity of a bond is the rate of return an investor would earn if they held the bond until it matures. To calculate the yield to maturity, we need to use the present value formula and solve for the yield. In this case, we have a 20-year $1,000 par value bond with a coupon rate of 7% paid semiannually. The bond is priced at $1,251.03. We will use the following formula:
- PV = C/(1+r/2) + C/(1+r/2)^2 + ... + C/(1+r/2)^n + F/(1+r/2)^n
Where PV is the present value, C is the coupon payment, r is the yield to maturity, n is the number of periods, and F is the par value.
We will use trial and error to find the yield to maturity that makes the present value equal to the bond price. By calculating the present value with different interest rates, we find that the yield to maturity is approximately 2.81%.