I have a formula that I am struggling with for my for personal finance class.
9. An investor purchase a bond for $953 on January 2, 1997. The bond has a face value of $1,000 and a stated interest rate of 6.85 percent. It matures on December 31, 2016. The yield to maturity on this bond is _____ percent.
"D" is incorrect. The yield to maturity is 6.85 x (1000/ 953) = 7.1878. That is 7.19 that is c and not d.
Yield To Maturity - YTM
The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as "yield" for short.
The academic definition is as follows: "the market interest rate that equates a bond's present value of interest payments and principal repayment with its price."
An approximate YTM can be found by using a bond yield table. However, because ...
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