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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

Retired persons often have much of their wealth placed in savings accounts and other interest-bearing investments and complain whenever interest rates are low. Do they have a valid complaint?

True or False: With a discount bond, the return on the bond is equal to the rate of capital gain.

A lottery claims its grand prize is \(15 million, payable over five years at \)3,000,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 7%.

Do bondholders fare better when the yield to maturity increases or when it decreases? Why?

If mortgage rates rise from 5% to 10% but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to buy houses?
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