Question

Mary wants to invest her recent bonus in an 12-year, 8 percent coupon bond that pays semiannual coupon payments. The bonds are selling at $1,043.24 today. If she buys this bond and holds it to maturity, what would be her yield-to-maturity

Answer 1

7.48%

Step-by-step explanation:

yield to maturity = {coupon + [(face value - market value)/n]} / [(face value + market value)/2]

yield to maturity = {40 + [(1,000 - 1,043.24)/24]} / [(1,000 + 1,043.24)/2] = 38.2 / 1,021.62 = 0.03739 x 2 = 0.07478 x 100 = 7.48%

whenever you purchase a bond at a premium (price higher than face value), the yield to maturity will be lower than the coupon rate