A 2-year maturity bond with face value of $1,000 makes annual coupon payments of

Question

A 2-year maturity bond with face value of $1,000 makes annual coupon payments of $120 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 (Do not round intermediate calculations. Round your answers to 2 decimal places.)

A 2-year maturity bond with face value of $1,000 makes annual coupon payments of $120 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 (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Explanation / Answer

(b) 12 %

because 120 is 12% of $1,000

The price of the bond decreases. The coupon payments stay the same, but the bond price decreases, causing the effective interest rate to increase.

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