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, 2019. Company (Ticker) Coupon Maturity Last Price Last Yield EST Vol (000s) IOU (IOU) 6.8 Apr 15, 2032 103.166 ?? 1,830 a. 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.) b. 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.)

Answer 1

Answer a.

Face Value = $1,000

Current Price = 103.166% * $1,000
Current Price = $1,031.66

Annual Coupon Rate = 6.800%
Semiannual Coupon Rate = 3.400%
Semiannual Coupon = 3.400% * $1,000
Semiannual Coupon = $34

Time to Maturity = 13 years
Semiannual Period = 26

Let Semiannual YTM be i%

$1,031.66 = $34 * PVIFA(i%, 26) + $1,000 * PVIF(i%, 26)

Using financial calculator:
N = 26
PV = -1031.66
PMT = 34
FV = 1000

I = 3.218%

Semiannual YTM = 3.218%

Annual YTM = 2 * 3.218%
Annual YTM = 6.44%

Answer b.

Current Yield = Annual Coupon / Current Price
Current Yield = $68 / $1,031.66
Current Yield = 0.0659 or 6.59%