Question

A 4-year maturity bond with a face value of $1,000 makes semiannual coupon payments and has an annual coupon rate of 15%. What is the bond’s yield to maturity if the bond is selling for $980?

a) 16.33%
b) 15.51%
c) 17.24%
d) 14.80%

Answer 1

The correct answer is option c. The yield to maturity of the bond is approximately 17.24%.

Step-by-step explanation:

The yield to maturity of a bond can be calculated using the present value formula. In this case, the bond has a face value of $1,000 and is selling for $980. The annual coupon payment is 15% of $1,000, so it is $150 per year. Since the bond makes semiannual payments, the coupon payment for each period is $75. The bond has a maturity of 4 years, so there are 8 periods. Using the present value formula, the yield to maturity is calculated as follows:

YTM = (Coupon Payment x (1 - (1 + YTM/2)^(-2n)) / (YTM/2)) + (Face Value / (1 + YTM/2)^2n)

Where YTM is the yield to maturity, n is the number of periods (8 in this case), and the coupon payment is $75. By plugging in the values and solving the equation, the yield to maturity is approximately 17.24%.