Question

Bill has a 7-year, 8.9% bond issue selling for $991.78.

1. What is the yield to maturity on this bond?

2. Is the bond selling at a premium or a discount?

3. What is the current yield on this bond?

Remember: bond interest payments are semi-annual, and maturity and face value are $1,000

Answer 1

1)

Yield to maturity is

9.06%

Working:

Yield to maturity

=

=rate(nper,pmt,-pv,fv)*2

Where,

=

=rate(N6,N7,-N8,N9)*2

nper

7*2

=

14

=

9.06%

pmt

1000*8.9%*6/12

=

$       44.50

pv

=

$     991.78

fv

=

$       1,000

2)

Bond is selling at discount.

Working:

When bond is selling below face value, it is selling at discount.

In the current case, bond's selling price $ 991.78 is below face value of $ 1,000.

So, it is selling at discount.

3)

Current Yield

8.97%

Working:

Annual coupon payment in cash

=

Face Value * Coupon rate

=

1000*8.9%

=

$    89.00

Current Yield

=

Annual coupon paid in cash/Current Price

=

$    89.00

/

$ 991.78

=

8.97%