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Chapter 4: Q.18 (page 134)

What is the yield to maturity on a simple loan for \(1,500 that requires a repayment of \)15,000 in five years?

Short Answer

Expert verified

Th Yield to Maturity on a simple loan is 58.5%

Step by step solution

01

Step 1. Introduction

Bonds are debt instruments that are issued by governments or businesses to raise funds. Bu purchasign a bond, an invest lends money to the issuer. In return, the investor gets the principal amount along with the interest at the maturity of the bond.

02

Step 2. Explanation

YieldtoMaturitywillbecalculatedas:1500=15000(1+r)^n1500=15000(1+r)^5YTM=5$15000$1500=510-1=1.5848-1=0.585=58.5%

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Most popular questions from this chapter

What is the price of a perpetuity that has a coupon of $70 per year and a yield to maturity of 1.5%? If the yield to maturity doubles, what will happen to the perpetuity’s price?

What is the yield to maturity on a \(10,000-face-value discount bond, maturing in one year, which sells for \)9,523.81?

To help pay for college, you have just taken out a \(1,000 government loan that makes you pay \)126 per year for 25 years. However, you don’t have to start making these payments until you graduate from college two years from now. Why is the yield to maturity necessarily less than 12%? (This is the yield to maturity on a normal \(1,000 fixed-payment loan on which you pay \)126 per year for 25 years.)

Why would a government choose to issue a perpetuity, which requires payments forever, instead of a terminal loan, such as a fixed-payment loan, discount bond, or coupon bond?

Calculate the present value of a $1,300 discount bond with seven years to maturity if the yield to maturity is 8%.
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