Question

Four years ago, Linda Smith bought a ten-year, 8% coupon bond issued by Nvidia Corporation for $925.46. These bonds pay coupons semi-annually. If he sells this bond at the current price of $1,018.90, what will be his realized yield on this bond?

Answer 1

2.4%

Step-by-step explanation:

Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity. it is long term return which is expressed in annual rate.

n = Number of payment = 4 years x 2 = 8

F = Face value = $1,000

C = Coupon Payment = $1,000 x 8% x 6/12 = $40

FV = $925.46

FV = $1,018.90

Use following formula to calculate the realized yield

FV = PV x ( 1 + r )^n

$1,018.90 = $925.46 x ( 1 + r )^8

( 1 + r )^8 = $1,018.90 / $925.46

( 1 + r )^8 = 1.1

( ( 1 + r )^8 )^1/8 = 1.1^(1/8)

1 + r = 1.011985

r = 1.011985 - 1

r = 0.011985 per six month

r = 0.02397 = 2.4%