Question

Question 7 2 pts A coupon bond pays annual interest, has a par value of $1,000, matures in 5 (five) years, has a coupon rate of 7.45%, and has a yield to maturity of 8.82%. The current yield on this bond is % Do not put the % sign in your answer and round to 2 decimal points. Previous Next

Answer 1

Yield to maturity

= [ C + ( F – P ) / n ] / [ ( F + P ) / 2 ]

Where,

C = Annual Coupon = Face Value x Coupon Rate = $1,000 x 7.45% = $74.5

F = Face Value of the bond = $1,000

P = Current Price

n = Years left to maturity = 5

Yield to Maturity = 8.82% or 0.0882

So, putting the values in above equation we get

0.0882 = [ $74.5 + ( $1,000 – P ) / 5 ] / [ ($1,000 + P ) / 2 ]

So, 0.0882 x [ ($1,000 + P ) / 2 ] = [ $74.5 + ( $1,000 – P ) / 5 ]

So, $44.1 + 0.0441 x P = $274.5 – 0.20 x P

So, 0.2441 x P = $230.4

So, P = $230.4 / 0.2441

= $943.88

Current Yield = Annual Interest / Current bond price x 100

= $$74.5 / $943.88 x 100

= 7.89% or 7.89