what is the yield on a corporate bond with a $1000 face value purchased at a discount price of $850, if it…

what is the yield on a corporate bond with a $1000 face value purchased at a discount price of $850, if it pays 5% fixed interest for the duration of the bond?\nyield = ?%\nyield = \\frac{interest paid}{price paid}

what is the yield on a corporate bond with a $1000 face value purchased at a discount price of $850, if it pays 5% fixed interest for the duration of the bond?\nyield = ?%\nyield = \\frac{interest paid}{price paid}

Answer

Explanation:

Step1: Calculate annual interest

The face - value of the bond is $F = 1000$ and the interest rate is $r=5%=0.05$. The annual interest payment $I$ is calculated as $I = F\times r$. $I=1000\times0.05 = 50$

Step2: Calculate the yield

The purchase price of the bond is $P = 850$. The yield $Y$ is given by the formula $Y=\frac{I}{P}\times100%$. $Y=\frac{50}{850}\times100%=\frac{5000}{850}% \approx 5.88%$

Answer:

$5.88$