We calculated yields on zero-coupon bonds in class. But we can also calculate the yield-to-maturity of a coupon bond. The definition of a yield for a coupon bond would be the fictitious, constant return that the bondholder must get if he held the bond to maturity and reinvested the coupons at that rate of return. This is analogous to the definition of yield for a zero-coupon bond, but with the clause that you can reinvest the coupon receipts at this rate too. The mathematical definition is as follows. Suppose the coupon bond pays C each period for N periods, and in the final period it pays the face value F. If compounding occurs n times per period, the yield-to-maturity is the net return y such that Nn P = > C F + (1) j=1 (1 + 2 ) (1 + y) Nn When coupon payments are 5% made n times a year, we have C = 0.05 x F. (a) Compute the yield-to-maturity for a one-year coupon bond priced at 100, with a face value of 100 and 5% annual coupon payments ( this bond is priced at par since the face value and the price are equal ) [2 marks] A 5%p.a. B 5.5%p.a. C 5.01 %p.a. D 7%p.a. E 6%p.a