Using the yield-approximation formula discussed in your text, determine the average annual yield on a bond whose current price is $1,100, par value is $1,000, coupon rate is 12 percent and whose term to maturity is ten years. Your answer is (to the nearest tenth of a percent):
A) 10.5 percent
B) 11 percent
C) 11.5 percent
D) 12 percent
E) 12.5 percent

Question

Quizplus · Accepted Answer

The yield approximation formula is: Yield ≈ [Annual Interest + (Par Value - Current Price) / Years to Maturity] / [(Par Value + Current Price) / 2]. Plugging in the given values: Yield ≈ [$120 + ($1,000 - $1,100) / 10] / [($1,000 + $1,100) / 2] = $120 - $10 / $1,050 = $110 / $1,050 ≈ 10.5%.

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