Question

A bond will pay $80 in interest at the end of each of the next three years, plus $1,000 at the end of the third year. If it has a present market price of $950, its yield-to- maturity is: (a) 8.5%. (b) 9.4%. (c) 10%. (d) 10.5%. (e) 11.2%.

Answer 1

(c) 10%

Step-by-step explanation:

The formula to calculate the yield to maturity is:

YTM= [C+ (F-P) / n] / [(F+P) / 2]

C = Coupon Payment : $80

F = Face Value : $1,000

P = Price : $950

n = Years to maturity: 3

YTM= [80+(1000-950)/3]/(1000+950)/2]

YTM=[80+16.67]/975

YTM=96.67/975

YTM= 0.1 = 10%