Question

4. Assuming the same coupon payment as listed in question 3 but now the price you pay for the bond increases to $101.00, what is the current yield, did it rise or fall? 5. Presume you purchased a 10 year year bond for $1,000, which has a face value of $1000.00. The bond pays an annual coupon of $60.00 and has an interest rate (Yeild to maturity) of of 6%. Presume you decide to sell the bond after 1 year for $1100.00. This means you sold a 9 year bond. Given the above information what is your holding period return? 6. Given the same information as listed in question 5, presume the yield to maturing increases to 7.3% and the bond price decreases to $945.00, what is the holding period return or loss? Is this a capital gain or loss?

I need #4

Answer 1

4.

Annual coupon payment = $6

Price paid for the bond = $101

Face value of the bond = $100

Let, current yield = R

Then,

101 = 6/(1+R) + 100/(1+R)

(1+R) = 106/101

R = (106/101 - 1)

R = 4.95%

So, current yield is 4.95%.

It can be observed that current yield decreased, because price paid ($101) is greater than the face value of the bond.

There is an inverse relation between price of the bond and current yield of the bond. With increase in price, the value of current yield decreased.