Question

Consider a 15%, 20 year bond that pays interest annually, and its current price is $850. What is the promised yield to maturity?

a.10.23%
b.18.45%
c.2.31%
d.17.77%
e.9.26%

Answer 1

The promised yield to maturity for the 15%, 20-year bond is d. 17.77%.

Step-by-step explanation:

Yield to maturity (YTM) is the total return anticipated on a bond if it is held until it matures. To calculate the YTM, we can use the formula:

YTM = (Annual Interest Payment + (Face Value - Current Price) / Number of Years) / ((Face Value + Current Price) / 2)

For this 15%, 20-year bond with a current price of $850, the YTM can be calculated as follows:

YTM = (15% + ($1,000 - $850) / 20) / (($1,000 + $850) / 2) = 17.77%

Therefore, the promised yield to maturity for this bond is 17.77%, which corresponds to option d.