Question

Acme Products has a bond issue outstanding with 8 years remaining to maturity, a coupon rate of 10% with interest paid annually, and a par value of $1,000. If the current market price of the bond issue is $814.45, what is the yield to maturity, rd?
a. 13%
b. 15%
c. 12%
d. 16%

Answer 1

Answer:

a. 13%

Explanation:

Interest Payment = C = $1,000 x 10% = $100

Face Value = F = $1,000

Market Price = P = $814.45

Year to maturity = n = 8 years

Yield to Maturity = [ C + ( ( F - P ) / n )] / [ ( F + P ) / 2 ]

Yield to Maturity = [ $100 + ( ( $1,000 - $814.45 ) / 8 )] / [ ( $1,000 + $814.45 ) / 2 ]

Yield to Maturity = [ $100 + 23.19 ] / 907.225

Yield to Maturity =  123.19 / 907.225

Yield to Maturity = 13.5%

So the nearest option is a. 13%