Question

I purchase a 10 percent coupon bond. Based on my purchase price, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is:_____.

A) 10 percent.
B) 8 percent.
C) 12 percent.
D) there is not enough information to determine the return.

Answer 1

If you hold a bond with a 10 percent coupon rate and a calculated 8 percent yield to maturity until it matures, your return is 8 percent. This includes the coupon payments received and any capital gains or losses realized upon maturity.

Step-by-step explanation:

When calculating the bond yield, it is important to consider the purchase price, coupon rate, and yield to maturity. If you purchased a bond with a 10 percent coupon rate and you've calculated a yield to maturity of 8 percent, the yield to maturity is the return you will earn if you hold the bond until it matures, assuming all payments are made as scheduled and you are able to reinvest each coupon payment at the yield to maturity rate. Option B is correct .

In this case, the return on this asset if held to maturity is indeed 8 percent, as it is specifically stated that the yield to maturity has been calculated based on the purchase price. Yield to maturity includes both the coupon payments you receive and any capital gains or losses (difference between purchase price and face value at maturity). Therefore, if nothing changes and you hold the bond to maturity, your return will equal the yield to maturity you've calculated.

To simplify, if you buy a bond at a discount (less than its face value) and subsequently earn a higher rate (the 10 percent coupon) than the yield to maturity (8 percent) on your purchase price, the total return includes the interest income plus the capital gain achieved when the bond is redeemed at face value.

Answer 2

B) 8 percent.

Step-by-step explanation:

The yield to maturity is the expected rate of return of a bonds if held until maturity.

We are asked precisely for what rate are we receiving if held at maturity so we receive the yield to maturity.

That is a rate at which the discounted coupon payment and maturity payment matches the price we urchase the bonds.