Final answer:
The yield to maturity is the total return expected on a bond if held until it matures, considering semiannual interest payments and any capital gains or losses from purchasing the bond at a discount or premium. In the scenario provided, the bond's yield to maturity is given as 9.66%. Interest rates affect bond prices and yields inversely.
Step-by-step explanation:
The student has asked about the calculation of the yield to maturity on a bond Huan Zhang bought for $911.10. To calculate the yield to maturity you would need to use a financial calculator or an equation that takes into account the present value, face value, coupon rate, and number of periods. However, considering that we are provided with the yield to maturity as 9.66%, our goal is to explain this concept more generally.
Yield to maturity (YTM) represents the total return anticipated on a bond if the bond is held until the end of its lifetime. This includes interest payments made semiannually at an 8.25 percent rate in this case, plus any capital gains or losses if the bond was purchased at a discount (as Huan Zhang did) or at a premium.
When interest rates rise, the price of bonds issued at lower rates tends to decrease, which increases the yield for a new investor buying the bond at that lower price. This is because the fixed coupon payments are less attractive when compared to new bonds issued at the higher current rates. Conversely, when interest rates fall, bonds with higher rates become more valuable and their price increases, leading to a lower yield for new investors.