What is the expected rate of return on a bond that pays a coupon rate of 9% paid semi - annually, has a par value of $1,000, matures in five years, and is currently selling for $1071? a. 8.40% b. 7.28% c. 3.64% d. 4.21%

Question

Daphne

Business

26 September, 07:32

What is the expected rate of return on a bond that pays a coupon rate of 9% paid semi - annually, has a par value of $1,000, matures in five years, and is currently selling for $1071? a. 8.40% b. 7.28% c. 3.64% d. 4.21%

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Answers (1)

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Aracely Conrad · Answer 1

b. 7.28%

Explanation:

This question is asking for the yield to maturity (YTM) of the bond. You can solve this using a financial calculator with the inputs below. Additionally, adjust the coupon payment (PMT) and time to maturity (N) to semiannual basis.

Time to maturity; N = 5*2 = 10

Face value; FV = 1000

Price of bond; PV = - 1071

Semiannual coupon payment; PMT = (9%/2) * 1000 = 45

then compute semiannual interest rate; CPT I/Y = 3.64%

Next, convert the semiannual rate to annual rate (YTM) = 3.64% * 2

YTM = 7.28%