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The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity? B) 6.92 percent D) 7.22 percent A) 6.97 percent C) 6.88 percent E) 7.43 percent

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Answer:

The answer is D. 7.22 percent

Explanation:

Interest payments are being made semiannually, this means it is being paid twice in a year

N(Number of periods) = 16 periods ( 8 years x 2)

I/Y(Yield to maturity) = ?

PV(present value or market price) = $987

PMT( coupon payment) = $35 ( [7 percent÷ 2] x $1,000)

FV( Future value or par value) = $1,000.

We are using a Financial calculator for this.

N= 16; PV = -987 ; PMT = 35; FV= $1,000; CPT I/Y= 3.61

3.61 percent is the Yield-to-maturity for semiannual

Therefore, the Yield-to-maturity of the bond annually is 7.22 percent (3.61 percent x 2)

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