Question

Bonds issued by Oxygen Optimization were priced at 800.7 dollars 6 months ago. The bonds pay semi-annual coupons, have a coupon rate of 15.24 percent, just made a coupon payment, and have a face value of 1,000 dollars. If the bonds had a percentage return over the past 6 months (from 6 months ago to today) of -2.72 percent, then what is the current yield of the bonds today?

Answer 1

Solution:

First, we calculate the current price of bond using the percentage return

Percentage return = (Current price - Price of bond 6 months ago + Coupon payment)/Price of bond 6 months ago

-2.72% = (Current price - $800.7 + $1000*0.1524/2)/$800.7

-2.72% = (Current price - $800.7 + $76.2)/$800.7

-2.72% = (Current price -$724.5)/$800.7

Current price = $702.721

Now, we find the current yield of the bond

Current yield = Coupon payment/Current price

Current yield = $76.2/$702.721

Current yield = 0.1084 or 10.84%

Hence, the current yield of the bonds today is 10.84%.