Answer
The yield is 6.5%
Problem Statement
The question tells us to calculate the yield on a corporate bond with $1000 face value bought with a discount at $925 with 6% fixed interest for the duration of the bond
Method
To solve the question, we need to follow these steps:
1. Calculate the interest paid:
2. Apply the yield formula given:
[tex]\begin{gathered} \text{yield}=\frac{\text{Interest paid}}{\text{price paid}} \\ \text{where,} \\ \text{price paid = price after deducting discount} \end{gathered}[/tex]
Implementation
1. Calculate the Interest paid:
This is given by:
[tex]\begin{gathered} \text{ interest paid = }\frac{6}{100}\times\text{ \$1000} \\ \text{ interest paid = \$60} \end{gathered}[/tex]
2. Apply the yield formula:
[tex]\begin{gathered} \text{yield}=\frac{\text{ interest paid}}{\text{price paid}} \\ \text{ interest paid = \$60} \\ \text{price paid = \$925} \\ \\ \therefore\text{yield}=\frac{60}{925}\times100=0.06486\times100\approx0.065\times100 \\ \\ \therefore\text{yield}=6.5\text{ \%} \end{gathered}[/tex]
Final Answer
The yield is 6.5%
