Question

Dane purchased a 15-year, 10% bond in 2014. At the time, the yield to maturity (YTM) on the bond was 8.8%. The bond currently sells for $890. Assuming the bond is priced correctly, how does Dane's rate of return on the bond compare to the current YTM? Group of answer choices Rate of return > current YTM Rate of return = current YTM = 8.8% Rate of return < current YTM Rate of return = current YTM = 10%

Answer 1

Rate of return < current YTM

Step-by-step explanation:

In order to determine whether the current YTM is greater or less,we need to first of all determine the current YTM using excel rate formula as shown below:

=rate(nper,pmt,-pv,fv)

nper is the number of coupon payments the bond pay which is 15

pmt is the annual coupon payment of $100(10%*$1000)

pv is the current price of $890

fv is the face value of $1000

=rate(15,100,-890,1000)=11.58%

Since the rate of return is 8.8% while the current YTM is 11.58%,the third option is correct