Jack Wong purchased a five-year bond today at $1032.19. The bond pays 6.5 percent semi-annually and has a face value of $1000. What will be his yield to maturity?a.6.9%b.6.7%c.6.1%d.5.75%e.None of them.
Question
Jack Wong purchased a five-year bond today at 1000. What will be his yield to maturity?a.6.9%b.6.7%c.6.1%d.5.75%e.None of them.
Solution
The correct answer is b. 6.7%.
The yield to maturity (YTM) of a bond can be calculated using the formula:
YTM = [(C + (F - P) / n) / ((F + P) / 2)] * 100
where: C = annual coupon payment (in dollars) F = face value of the bond P = purchase price of the bond n = years until maturity
In this case, the bond pays 6.5% semi-annually, so the annual coupon payment is 65. Since the bond pays semi-annually, we need to divide this by 2 to get the semi-annual coupon payment, which is $32.5.
So, the YTM is [(32.5 + (1000 - 1032.19) / 5) / ((1000 + 1032.19) / 2)] * 100 = 6.7%.
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