Question

You just bought a 5-year, $1,000 par, 8% semiannual coupon bond for $1,070. You expect to sell it after 3 years (6 interest payments) for $975. What is your expected yield?

• A. 2.34%
• B. 4.69%
• C. 5.44%
• D. 6.34%
• E. 8.97%

Answer 1

Given about a bond,

A 5-year, $1,000 par, 8% semiannual coupon bond was bought for $1070.

after 3 years, it is expected to be sold at $975

face value = $1000

coupon rate = 8% paid semiannually

So, semiannual coupon payment = (8%/2) of 1000 = $40

for expected yield on the bond can be calculated on financial calculator using following values:

FV = 975

N = 2*3 = 6

PMT = 40

PV = -1070

compute for I/Y, we get I/Y = 2.343

So, annual expected yield = 2*2.343 = 4.69%

Option B is correct.