Explanation

To calculate the yield-to-maturity (YTM) for this bond:

• Bond details:

  • Current price: $975.00
  • Par value: $1,000 (assumed)
  • Annual coupon: 6.0% = $60 per year
  • Maturity: 8 years

• YTM calculation: The YTM is the discount rate that makes the present value of future cash flows equal to the current bond price:

  $975 = \frac{60}{(1+YTM)^1} + \frac{60}{(1+YTM)^2} + \cdots + \frac{60}{(1+YTM)^8} + \frac{1000}{(1+YTM)^8}$

• Analysis: Since the bond is selling at a discount ($975 < $1,000), the YTM must be greater than the coupon rate of 6.0%. This eliminates option A (5.88%).

  Using trial and error or financial calculator:

  • At 6.41%: Present value ≈ $975
  • At 6.89%: Present value would be lower than $975
  • At 7.14%: Present value would be even lower

• Conclusion: The correct YTM is 6.41% (Option B), which makes the present value of cash flows equal to the current bond price of $975.