A P 1,000,000 issue of 3%, 15-year bond was sold at 95%. What is the rate of interest of this investment? A. 3.0% B. 3.4% C. 3.7% D. 4.0%

The correct answer is B. 3.4%.

The formula for calculating the yield to maturity of a bond is:

$YTM = \dfrac{C + \dfrac{F – P}{N}}{P}$

where:

• $C$ is the annual coupon payment
• $F$ is the face value of the bond
• $P$
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  is the purchase price of the bond
• $N$ is the number of years to maturity

In this case, we have:

• $C = 3\% \times 1,000,000 = 30,000$
• $F = 1,000,000$
• $P = 0.95 \times 1,000,000 = 950,000$
• $N = 15$

Substituting these values into the formula, we get:

$YTM = \dfrac{30,000 + \dfrac{1,000,000 – 950,000}{15}}{950,000} = 3.4\%$

Therefore, the rate of interest of this investment is 3.4%.

Option A is incorrect because it is the coupon rate of the bond, not the yield to maturity.

Option C is incorrect because it is the yield to maturity of a bond that is sold at par value.

Option D is incorrect because it is the yield to maturity of a bond that is sold at a discount of 5%.