A bond with no expiration date has a face value of R10.00 and pays a fixed 10 percent interest. If the market price of the bond rises to R14.00, the annual yield approximately equals :

Answer 1

To calculate the annual yield of a bond with no expiration date (often referred to as a perpetuity), you can use the formula for yield:

\[ \text{Yield} = \frac{\text{Annual Interest Payment}}{\text{Market Price}} \]

In this case:

• The face value of the bond is R10.00, and it pays a fixed interest rate of 10%. Therefore, the annual interest payment is:

\[ \text{Annual Interest Payment} = 10% \times \text{Face Value} = 0.10 \times 10 = R1.00 \]

• The market price of the bond is R14.00.

Now substituting these values into the yield formula:

\[ \text{Yield} = \frac{R1.00}{R14.00} \approx 0.0714 \text{ (or 7.14%)} \]

Thus, the annual yield of the bond is approximately 7.14%.