Suppose the following bond quote for IOU Corporation appears in the financial pa

Question

Suppose the following bond quote for IOU Corporation appears in the financial page of today’s newspaper. Assume the bond has a face value of $1,000, and the current date is April 15, 2016. Company (Ticker) Coupon Maturity Last Price Last Yield EST Vol (000s) IOU (IOU) 9.30 Apr 15, 2031 91.625 ?? 1,836

What is the yield to maturity of the bond? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Yield to maturity %

What is the current yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Current yield %

Explanation / Answer

The bond has 15 years to maturity, so the bond price equation is:

P = $916.25 = $46.50(PVIFAR%,30) + $1,000(PVIFR%,30)

Using a spreadsheet, financial calculator, or trial and error we find

P =

R = 5% + ( 946.1959 - 916.25) / ( 946.1959 - 814.1478)

= 5.2268 %

This is the semiannual interest rate, so the YTM is:

YTM = 2 × 5.2268%

YTM = 10.4536%

2.

The current yield is the annual coupon payment divided by the bond price, so:

Current yield = $93.00 / $916.25

Current yield = .1015, or 10.15%

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