yield rate

Question

Find the yield rate for a bond purchased at a quoted price of $2,250 redeemable in 10 years. The face value is $2,000 at a coupon rate of 6 1/4%.

Answer 1

I am going to assume semi-annual coupon payments. The bond then gives 20 semi-annual payments of 2000*6.25%/2 =62.5 plus the 2000 par value on the 20th payment. The yield rate is the internal rate of return that makes the present value minus the price equal to zero. You can layout the cash flows in Excel and use the IRR function (if you do this it will give you the semi-annual rate which you will double for the annual nominal rate) or you can use the YIELD function. Either way, the result is 4.67%. The yield is less than the coupon rate because the bond is bought at a premium (above par value.)