Using the yield-approximation formula discussed in your text, determine the average annual yield on a bond whose current price is $800, par value is $1,000, coupon rate is 15 percent and whose term to maturity is 5 years. Your answer is (to the nearest percent):
A) 35 percent
B) 21 percent
C) 16 percent
D) 12 percent
E) 9 percent

Question

Quizplus · Accepted Answer

The yield approximation formula is: Yield ≈ (C + (F - P) / n) / ((F + P) / 2), where C is the annual coupon payment, F is the face value, P is the price, and n is the number of years to maturity. Plugging in the given values: C = 0.15 * 1000 = $150, F = $1000, P = $800, and n = 5, we get Yield ≈ (150 + (1000 - 800) / 5) / ((1000 + 800) / 2) = (150 + 40) / 900 = 190 / 900 ≈ 0.2111 or 21% to the nearest percent.

Using the Yield-Approximation Formula Discussed in Your Text, Determine the Average