Final answer:
The yield to maturity on Alice Trang's six-year bond that pays a coupon of 10 percent semiannually and is priced at $878.21 can be estimated slightly higher than 12%, leading us to select option C) 13% as the closest answer.
Step-by-step explanation:
Alice Trang is considering buying a six-year bond with a 10 percent coupon rate that is paid semiannually and has a current price of $878.21. To calculate the bond's yield to maturity (YTM), we use the formula which equates the present value of the bond's future cash flows (coupons and face value) to its current price. The YTM is the discount rate at which these values are equal.
Given the semiannual payment, we must consider that each coupon payment is $50 (10% of $1,000 face value, divided by two for semiannual). There will be 12 coupon payments over the six years. The face value of the bond, which will also be paid at the end of the term, is $1,000. By using a financial calculator or YTM formula, we would find the rate that discounts the cash flows to the current bond price of $878.21.
In this case, we will use the given value and calculation provided in the reference material, where a similar bond with coupons and face value totaling $1,080 and current price $964 yields a rate of 12%. Therefore, we can estimate that the correct answer for Alice's bond, with a lower current price, would be a YTM slightly higher than 12%, which aligns with option C) 13%.