Question

Pharoah Corp. management plans to issue seven-year zero coupon bonds. It has learned that these bonds will sell today at a price of $441.46. What is the yield to maturity on these bonds?

Answer 1

12.391%

Step-by-step explanation:

The yield to maturity on the seven-year zero coupon bond can be determined using the present value below:

PV=FV/(1+r)^n

PV=current price=$441.46

FV=face value at redemption=$1000

r=unknown yield to maturity

n=duration of the zero coupon=7 years

441.46=1000/(1+r)^7

1000/441.46=(1+r)^7

divide index by 7 on both sides

( 1000/441.46)^(1/7)=1+r

1.123905524 =1+r

r=1.123905524 -1=12.39%