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30 December, 01:06

You just purchased a bond that matures in 15 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.37%. What is the bond's yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

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  1. 30 December, 04:28
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    7.48%

    Explanation:

    Current yield is the ratio of coupon receipt on a bond to the current market price of the bond. It is rate of interest income received from the bond to the current market price of the bond.

    Face value = F = $1,000

    Coupon payment = $1,000 x 8% = $80

    Selling price = P = $1,050

    As we know

    Current yield = Coupon payment / Current market price

    8.37% = $80 / Current Market value

    Current Market value = $80 / 8.37%

    Current Market value = $955.79

    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.

    Number of payment = n = 13 years

    Yield to maturity = [ C + (F - P) / n ] / [ (F + P) / 2 ]

    Yield to maturity = [ $80 + (1000 - 1050) / 15 ] / [ (1,000 + 1050) / 2 ]

    Yield to maturity = 7.48%
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