Question

Jane Almeda is interested in a 10-year bond issued by Roberts Corp. that pays a coupon of 10 percent annually. The current price of this bond is $1,174.45. What is the yield that Jane would earn by buying it at this price and holding it to maturity? (Round to the closest answer.)

A) 7.1%
B) 7.5%
C) 8.9%
D) 8.5%

Answer 1

Jane would earn a yield of approximately 8.5% by buying the Roberts Corp. bond at its current price and holding it until maturity, which considers the annual coupon payments and the capital gain or loss upon maturity.

Step-by-step explanation:

Jane Almeda is considering purchasing a bond that pays a 10% annual coupon and wants to know the yield she would earn by buying this bond at its current price and holding it to maturity.

The bond's face value is $1,000 (which is implied in the bond market standard), and it is being sold for $1,174.45. The annual coupon payment is 10% of the face value, which is $100 per year. To find the yield to maturity (YTM), we need to consider the total returns over the 10-year period, including both the annual interest payments and the difference between what she pays for the bond and the face value she'll receive at the end of the bond's term.

Using a financial calculator or a present value formula, the YTM turns out to be approximately 8.5%, which is option D. This yield includes receiving $100 annually for 10 years and getting the face value of $1,000 at the end of the bond's term, minus the purchase price of $1,174.45.