Question

Mary wants to invest her recent bonus in an eight-year bond that pays a coupon of 9 percent annually. The bonds are selling at $1,125.46 today. If she buys this bond and holds it to maturity, what would be her yield?

Answer 1

Basically if the price is give as 1125.46 at time 0 it is assumed that the par value is 1000 and the yield will be lower than the coupon rate. The bond is selling at a premium to sum up.

Now to calculate the yield, we need to solve the following equation:

Coupon is always calculated on the par value

Now we can either find r by hit and trial method or by using the excel's rate function or a financial calculator.

using excel by inputting the following in the rate function:

nper	8 years
pmt	0.09 x 1000
pv	-1125.46
fv	1000

PV is negative because we need to pay it to obtain the bond and therefore it is an outflow. Or mathematically, if we bring it to the other side of the equal to sign then it will become negative.

So the yield is 7% approximately if rounded to next highest integer.