Question

Claribel has a $500 bond with a 4% coupon. Claribel purchased this bond for

$525. What is the yield of this new bond?

A. 3.5%

3.8%

o oo

O C.4%

O D. 4.2%

Answer 1

The yield of this new bond is approx 3.8%.

Explanation:

Given : Claribel has a $500 bond with a 4% coupon. Claribel purchased this bond for $525.

To find : What is the yield of this new bond?

Solution :

As coupon is 4 % , a $ 500 bond earns is given by,

`4\% \text{ of } 500= 0.04* 500= $20`

A $ 500 bond earns $ 20 in a year.

Now as market price of bond is $ 525 , but it earns $ 20

The rate of interest earned is

`(20* 100)/(525)= (80)/(21)=3.81\%`

Therefore, the yield of this new bond is approx 3.8%.