Amy purchased a five-year $5,250 bond below par value for $4,675 with a coupon of 3.5%. What was her yield?

3.9%

3.8%

3.5%

3.1%

Tell me WHY you got it.

Question

Russell Warner

Mathematics

8 October, 08:48

Amy purchased a five-year $5,250 bond below par value for $4,675 with a coupon of 3.5%. What was her yield?

3.9%

3.8%

3.5%

3.1%

Tell me WHY you got it.

+3

Answers (1)

Know the Answer?

Semaj Walsh · Answer 1

Her yield was 3.5%.

A bond price is built from the sum of present value of future cash flow created from the bond (Bond Price=Present Value of Cash Flow Period 1 + Present Value of Cash Flow period 2 + ... + Present Value of Cash Flow period n). In this transaction, the formula can be simplified as:

Bond Price = Present Value of Annuity of Coupon Payment + Present Value of Bond Par Value

The formula above can be reversed using simple mathematics in order to find another number beside the bond price, which is the interest yield. The interest yield can be found by matching the bond price with suitable interest rate using trial and error method. There are already 4 different choices that already available on the question, therefore only 4 attempts of trial and error should be made to find the bond's yield.

Amy purchased a five-year $5,250 bond below par value for $4,675 with a coupon of 3.5%. What was her yield?3.9%3.8%3.5%3.1%Tell me WHY you got it.

Amy purchased a five-year $5,250 bond below par value for $4,675 with a coupon of 3.5%. What was her yield?

3.9%

3.8%

3.5%

3.1%

Tell me WHY you got it.