FRM Part I · FRM Exam Part I · Interest Rates
A two-year bond with a face value of 1,000 pays a 6% annual coupon and is priced at 964.33. Which is the bond's yield to maturity, compounded annually?
The yield to maturity is 8.00%. Discounting the 60 coupon and the 1,060 final payment at 8% gives about 964.33, equal to the price. The coupon rate of 6% and the current yield of 6.22% ignore the capital gain to par.
- A8.00%Correct
- B6.00%
- C6.22%
- D7.00%
Explanation
At 8%: 60/1.08 + 1,060/1.08^2 = 55.56 + 908.78 = 964.34, which matches the price. 6.22% is the current yield (60/964.33), a different measure that ignores the pull to par. 6% is the coupon rate, which would apply only if the bond traded at par.
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