A 2-year maturity bond with face value of $1,000 makes annual coupon payments of $80 and is selling at face value. What will be the rate of return on the bond if its yield to maturity at the end of the year is: Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places
A 2-year maturity bond with face value of $1,000 makes annual coupon payments of $80 and is selling at face value. What will be the
Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.
Bonds are a type of investment instrument that allows the investor to secure a certain quantity of money over a certain length of time at a certain rate of return. The issuer uses it as a source of capital while still being required to pay the buyer pre-determined interest. The coupon rate refers to the particular rate of interest that is due on a bond.
In addition to taking into consideration the bond's current market price, par value, coupon interest rate, and term to maturity, yield to maturity (YTM) also make the assumption that the periodic payments will be reinvested at the same current yield of the bond. Because coupon payments cannot always be reinvested at the same interest rate, the YTM only provides a snapshot of a bond's return. The YTM will rise in response to an increase in interest rates and fall in response to a decrease in interest rates.
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