Question

What is the yield on a corporate bond with a $1000

face value purchased at a discount price of $875, if
it pays 7% fixed interest for the duration of the
bond?
yield = [?] %
Give your answer as a percent rounded to the nearest
hundredth.

Answer 1

Answer: yield = ($70 / $875) x 100% = 8% (rounded to the nearest hundredth)

Explanation:

To calculate the yield on a corporate bond, we need to use the following formula:

yield = (annual coupon payment / bond price) x 100%

In this case, the bond has a face value of $1000 and pays a fixed interest rate of 7%. The bond was purchased at a discount price of $875. The annual coupon payment can be calculated as:

annual coupon payment = face value x coupon rate = $1000 x 7% = $70

Using the formula above, we can calculate the yield as:

yield = ($70 / $875) x 100% = 8%

Therefore, the yield on this corporate bond is 8% rounded to the nearest hundredth.