Question

What is the yield to maturity on a \(10,000-face-value discount bond, maturing in one year, which sells for \)9,523.81?

Short answer

Yield to Maturity will be 5%

Step-by-step solution

Step 1. Introduction

The internal rate of return required for the existing cost of all future cash flows of the bond (face cost and coupon bills) to same the present day bond charge is called the yield to maturity (YTM). All coupon bills are reinvested at a yield same to the YTM, and the bond is held to maturity, in line with YTM.

Step 2. Explanation

$$\begin{gathered} YieldtoMaturity: \\ 9523.81=\frac{10,000}{(1+YTM)} \\ \frac{10,000}{9523.81}=1+YTM \\ 1+YTM=1.0499 \\ YTM=4.99\% \\ YTM=5\%\left(approx\right) \end{gathered}$$