A bond with a face value of $1,000 has 14 years until maturity, carries a coupon

Question

A bond with a face value of $1,000 has 14 years until maturity, carries a coupon rate of 7.6%, and sells for $1,089 a. What is the current yield on the bond? (Enter your answer as a percent rounded to 2 decimal places.) Current yield b. What is the yield to maturity if interest is paid once a year? (Do not round intermediate calculations Enter your answer as a percent rounded to 4 decimal places.) Yield to maturity c. What is the yield to maturity if interest is paid semiannually? (Do not round intermediate calculations Enter your answer as a percent rounded to 4 decimal places.) Yield to maturity

Explanation / Answer

a:

Current Yield = Annual Coupon Payment/Current Price

Current Yield = 1000*0.076/1089 = 0.069789 = 6.98%

b:

FV = $1000, PV = 1089, N = 14, PMT = 1000*0.076 = $76; compute r = 0.066062

YTM = 6.6062%

c:

FV = $1000, PV = 1089, N = 28, PMT = 76/2 = $38; compute r = 0.033077

YTM = 2*0.033077 = 0.066153 = 6.6153%

Finding rate using formula is tedious; use your financial calculator or excel RATE function for same.

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