5-14. A U.S. government bond matures in 10 years. Its quoted price is now 96.4,

Question

5-14. A U.S. government bond matures in 10 years. Its
quoted price is now 96.4, which means the buyer will
pay $96.40 per $100 of the bond’s face value. The bond
pays 5% interest on its face value each year. If $10,000
(the face value) worth of these bonds are purchased
now, what is the yield to the investor who holds the
bonds for 10 years? (5.3)

Sullivan, William G.; Wicks, Elin M.; Koelling, C. Patrick (2014-01-06). Engineering Economy (16th Edition) (Page 226). Prentice Hall. Kindle Edition.

Explanation / Answer

Ans:

Current Yield = (Annual Interest /price)*100

                         = 500/9640

                          = 5.19%

YTM   =   [C + (F-P)/n]/(F+P)/2

Where

C = Coupon/Interest payment

F = Face Value

P = Price

n = years to Maturity

YTM = [5+(100-96.4)/10]/(100+96.4)/2

         = 5.46%   

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