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Chapter 4: Q.17 (page 134)

What is the yield to maturity on a \(10,000-face-value discount bond, maturing in one year, which sells for \)9,523.81?

Short Answer

Expert verified

Yield to Maturity will be 5%

Step by step solution

01

Step 1. Introduction

The internal rate of return required for the existing cost of all future cash flows of the bond (face cost and coupon bills) to same the present day bond charge is called the yield to maturity (YTM). All coupon bills are reinvested at a yield same to the YTM, and the bond is held to maturity, in line with YTM.

02

Step 2. Explanation

YieldtoMaturity:9523.81=10,000(1+YTM)10,0009523.81=1+YTM1+YTM=1.0499YTM=4.99%YTM=5%(approx)

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Most popular questions from this chapter

What is the formula used to calculate the yield to maturity on a 20-year coupon bond with a current yield of 12% and \(1,000 face value that sells for \)2,500

Consider a coupon bond that has a \(900 par value and a coupon rate of 6%. The bond is currently selling for \)860.15 and has two years to maturity. What is the bond鈥檚 yield to maturity?

Assume you just deposited \(1,250 into a bank account. The current real interest rate is 1%, and the expected rate of inflation over the next year is 5%. What nominal interest rate should the bank charge you over the next year? How much money will you have at the end of one year? If you are saving to buy a motorbike that currently sells for \)1,300, will you have enough money to buy it?

In this chapter, we discussed long-term bonds as if there were only one type, coupon bonds. In fact, investors can also purchase long-term discount bonds. A discount bond is sold at a low price, and the whole return comes in the form of a price appreciation. You can easily compute the current price of a discount bond by using the financial calculator at http://www .treasurydirect.gov/indiv/tools/tools_savingsbondcalc.htm.

To compute the values for savings bonds, read the instructions on the page and click on Get Started. Fill in the information (you do not need to fill in the Bond Serial Number field) and click on Calculate.

Calculate the present value of a $1,300 discount bond with seven years to maturity if the yield to maturity is 8%.
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