A U.S. government bond matures in 10 years. Its quoted price is now 97.8, which

Question

A U.S. government bond matures in 10 years. Its quoted price is now 97.8, which means the buyer will pay $97.80 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 is purchased now, what is the yield to the investor who holds the bonds for 10 years?

Explanation / Answer

9780 = 10000 (P/F, i'%, 10) + 10000(.05)(P/A,j'%, 20) Or, you can simplify your life a little doing it this way. 9780 = 10000 (P/F, j'%, 20) + 10000(.05)(P/A,j'%, 20) Make sure that (P/A...) calculation is set to "End of Period". I get, i' = 0.05 ==> 10047.67 > 9780 i' = 0.06 ==> 9318.39 < 9780 This is the tricky part. Solving for an internal rate cannot be done simply. It is an interative process. Unless your calculator has an IRR button, you must now guess at a better value. A typical way is linear interpolation. 10047.67-9780 = 267.67

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