Question

An investor pays $1,230 for a bond with a face value of $1,000 and an annual coupon rate of 9 percent. The investor plans to hold the bond until its maturity date in eight years. The bond has a yield to maturity of __________ percent. (Note: This question requires a financial calculator.)

		5.67
		5.39
		9.00
		10.94

Answer 1

Using the financial calculator we can calculate the rate as follows:

• FV = 1000
• PV = -1230
• N= 8
• PMT = 0.09 x 1000
  • PMT = 90
• CPT I/Y = 5.39

The same can be calculated by the following formula in Excel =RATE(8,90,-1230,1000) this will give rate = 5.39%

following scedule verifies the same:

Year	CF	Discount Factor	Discounted CF
1	$               90.00	1/(1+0.0539)^1=	0.948856628	0.948856627763545*90=	85.40
2	$               90.00	1/(1+0.0539)^2=	0.9003289	0.900328900050806*90=	81.03
3	$               90.00	1/(1+0.0539)^3=	0.854283044	0.85428304398027*90=	76.89
4	$               90.00	1/(1+0.0539)^4=	0.810592128	0.810592128266695*90=	72.95
5	$               90.00	1/(1+0.0539)^5=	0.769135713	0.769135713318811*90=	69.22
6	$               90.00	1/(1+0.0539)^6=	0.729799519	0.729799519232196*90=	65.68
7	$               90.00	1/(1+0.0539)^7=	0.692475111	0.692475110762117*90=	62.32
8	$               90.00	1/(1+0.0539)^8=	0.657059598	0.65705959840793*90=	59.14
8	$         1,000.00	1/(1+0.0539)^8=	0.657059598	0.65705959840793*1000=	657.06
				Price = Sum of all Discounted CF	1,230