Question

Problem 6 What is the current yield of a bond with a 9% coupon, four years until maturity, and a price of $750? Problem 7 How much should you pay for a $2,000 bond with 10% coupon, annual payments, and five years to maturity if the interest rate is 12%? Problem 8 What happens to the price of a three-year bond with an 9% coupon when interest rates change from 9% to 6%? Problem 9 How much should you be prepared to pay for a 10-year bond with a 8% coupon, semi-annual payments, and a semi-annually compounded yield of 7.5%? Problem 10 How much should you pay for a share of stock that offers a constant growth rate of 13%, requires a 18% rate of return, and is expected to sell for $50 one year from now?

Answer 1

1)

Current yield:

= Annual coupon payments÷Bond price

= $1,000×6%/$750

= $60/$750

= 8%

Hence, current yield 8%

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