Asked by Abo Yousef Khaleel on May 10, 2024
Verified
A bond has a current market value of $800. The holder of the bond will receive a single payment of $1,000 one year from now. The interest rate is 10 percent. The effective yield on the bond is:
A) $200.
B) 10 percent.
C) 25 percent.
D) negative.
E) The yield cannot be determined with the information provided.
Current Market Value
The present financial value of an asset or company based on its trading price in the market, subject to fluctuations.
Effective Yield
This is the total yield on an investment expressed on an annual basis, taking into account the compounding of interest.
Interest Rate
The annual rate at which interest is charged to the borrower, represented as a percentage of the still unresolved loan amount.
- Learn about bond valuation, focusing on the variables that affect the cost of bonds and their earnings.
Verified Answer
AB
Angela BenedettiMay 11, 2024
Final Answer :
C
Explanation :
The effective yield can be calculated using the formula:
Effective Yield = (Face Value / Current Market Value)^(1/n) - 1
where n is the number of years until the bond matures (in this case, n = 1).
Plugging in the given values, we get:
Effective Yield = ($1,000 / $800)^(1/1) - 1
= 1.25 - 1
= 0.25 or 25%
Therefore, the correct answer is C: 25 percent.
Effective Yield = (Face Value / Current Market Value)^(1/n) - 1
where n is the number of years until the bond matures (in this case, n = 1).
Plugging in the given values, we get:
Effective Yield = ($1,000 / $800)^(1/1) - 1
= 1.25 - 1
= 0.25 or 25%
Therefore, the correct answer is C: 25 percent.
Learning Objectives
- Learn about bond valuation, focusing on the variables that affect the cost of bonds and their earnings.