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.

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%