Dane purchased a 15-year, 10% bond in 2014. At the time, the yield to maturity (YTM) on the bond was 8.8%. The bond currently sells for $890. Assuming the bond is priced correctly, how does Dane's rate of return on the bond compare to the current YTM? Group of answer choices Rate of return > current YTM Rate of return = current YTM = 8.8% Rate of return < current YTM Rate of return = current YTM = 10%

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Petty

Business

18 September, 15:51

Dane purchased a 15-year, 10% bond in 2014. At the time, the yield to maturity (YTM) on the bond was 8.8%. The bond currently sells for $890. Assuming the bond is priced correctly, how does Dane's rate of return on the bond compare to the current YTM? Group of answer choices Rate of return > current YTM Rate of return = current YTM = 8.8% Rate of return < current YTM Rate of return = current YTM = 10%

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Answers (1)

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Lorelai Ross · Answer 1

Rate of return < current YTM

Explanation:

In order to determine whether the current YTM is greater or less, we need to first of all determine the current YTM using excel rate formula as shown below:

=rate (nper, pmt,-pv, fv)

nper is the number of coupon payments the bond pay which is 15

pmt is the annual coupon payment of $100 (10%*$1000)

pv is the current price of $890

fv is the face value of $1000

=rate (15,100,-890,1000) = 11.58%

Since the rate of return is 8.8% while the current YTM is 11.58%, the third option is correct