What is the yield to maturity on a discount bond that has a face value of $8000, is three years from maturity and is currently trading at $7450?
Question
What is the yield to maturity on a discount bond that has a face value of 7450?
Solution
To calculate the yield to maturity (YTM) on a discount bond, you can use the following formula:
YTM = [(FV / PV)^(1/n)] - 1
Where: FV = Face Value of the bond PV = Present Value or the price of the bond n = Number of years until maturity
In this case: FV = 7450 n = 3 years
Substituting these values into the formula, we get:
YTM = [(8000 / 7450)^(1/3)] - 1
Now, we just need to do the math:
- Divide 8000 by 7450 to get approximately 1.0738.
- Take the cube root of 1.0738 (since n=3) to get approximately 1.0241.
- Subtract 1 from 1.0241 to get 0.0241.
So, the yield to maturity on this bond is approximately 0.0241, or 2.41% when expressed as a percentage.
Similar Questions
What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19?
Consider a 3-year bond with a 6% coupon rate andSemi-annual (i.e., 2 x per year) couponsA face value of $1000 A yield of 5.5% Calculate its price
Suppose a five-year, $1 000 bond with annual coupons has a price of $897.83 and a yield to maturity of 6.3%. What is the bond's coupon rate?
What is the value of a bond with 6% semi annual coupons and YTM of 5% and 8 years to maturity?
What is the cash flow of a 8-year bond that pays coupon interest semiannually, has a coupon rate of 6%, and has a par value of $100,000?
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.