In 2000 Jenson Inc. issued bonds with an 8 percent coupon rate and a $1,000 face value. The bonds mature on March 1, 2025. If an investor purchased one of these bonds on March 1, 2012, determine the yield to maturity if the investor paid $1,100 for the bond.

Yield to maturity is 6.6%

Explanation:

Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity.

Face value = F = $1,000

Assuming Coupon payments are made annually

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

Selling price = P = $1,100

Number of payment = n = 13 years

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

Yield to maturity = [ $80 + (1000 - 1100) / 13 ] / [ (1,000 + 1100) / 2 ]

Yield to maturity = [ $80 - 7.7 ] / 1100 = $72.3 / 1100 = 0.066 = 6.6%