Asked by Joshua Palesano on Jun 11, 2024
Verified
A bond with a par value of $1,000 has an annual interest payment of $85.The bond currently sells for $850 and has 8 years to maturity.Which of the following is true?
A) The current yield on the bond must be 8.5%.
B) The investor's required rate of return must be 8.5%.
C) The coupon rate must be 8.5%.
D) The yield to maturity must be 8.5%.
Annual Interest Payment
The total amount of interest paid on a bond or loan over the course of a year.
Coupon Rate
The percent of the face value paid as interest on a bond every year.
Yield To Maturity
Yield to maturity is the total return anticipated on a bond if the bond is held until its maturity date, accounting for its current market price, par value, coupon interest rate, and time to maturity.
- Review how market interest rates determine the prices and yields associated with bonds.
- Acquire insight into the concept of yield to maturity and its critical role for bond investors.
Verified Answer
GN
godfred nyameJun 17, 2024
Final Answer :
C
Explanation :
The coupon rate is calculated as the annual interest payment divided by the par value of the bond, which in this case is $85/$1000 = 8.5%.
Learning Objectives
- Review how market interest rates determine the prices and yields associated with bonds.
- Acquire insight into the concept of yield to maturity and its critical role for bond investors.