Final answer:
The yield to maturity for a bond priced at par value is simply the coupon rate. As the bond in question is a 2-year bond with a $1,000 par value, a $106 annual coupon, and a price of $1,000, the yield to maturity is 10.6%.
Step-by-step explanation:
The question asks how to calculate the yield to maturity (YTM) for a 2-year bond with a par value of $1,000, an annual coupon payment of $106, and a price of $1,000. To find the YTM, which is the total return anticipated on a bond if the bond is held until it matures, we would typically use a financial calculator or a spreadsheet since the calculation involves solving for the rate in the present value of an annuity equation.
However, with the given information, the YTM can be easily found to be the same as the coupon rate because the bond is being sold at par value. Thus, the YTM is simply the annual interest divided by the bond price: $106 / $1,000 = 0.106 or 10.6%.
When interest rates in the market change, the price of existing bonds will fluctuate to reflect the new rates. Bonds with lower coupon rates than the prevailing interest rates will sell for less than their face value (discount), and bonds with higher coupon rates will sell for more than their face value (premium). In this particular case, because the bond's market price equals its face value, the YTM equals the coupon rate of the bond, which is 10.6%.