Consider a two-year bond that can be purchased for $550.What is the yield to maturity on the bond if it promises a payment of $890 in two years?
A)27.2 percent
B)20 percent
C)6 percent
D)18.1 percent

Question

Consider a two-year bond that can be purchased for $550.What is the yield to maturity on the bond if it promises a payment of $890 in two years?​
A)​27.2 percent
B)​20 percent
C)​6 percent
D)​18.1 percent

Quizplus · Accepted Answer

The yield to maturity (YTM) can be calculated using the formula for the present value of a future payment: $PV = \frac{FV}{(1 + YTM)^n}$, where PV is the present value ($550), FV is the future value ($890), n is the number of periods (2 years), and YTM is what we're solving for. Rearranging the formula to solve for YTM gives us $YTM = (\frac{FV}{PV})^{1/n} - 1$. Plugging in the numbers: $YTM = (\frac{890}{550})^{1/2} - 1 \approx 0.272$ or 27.2%.

Consider a Two-Year Bond That Can Be Purchased for $550