Question

A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a yield to maturity of 10.5883%. The bond pays coupons semiannually. What is the bond's current yield? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Information provided:

Face value= $1,000

Current price= present value= $1,020

Time= 7 years*2= 14 semi-annual periods

Yield to maturity= 10.5883%/2= 5.2942%

The question is solved by first calculating the amount of coupon payment.

Enter the below in a financial calculator to compute the amount of coupon payment:

FV= 1,000

PV= -1,020

N= 14

I/Y= 5.294245

Press the CPT key and PMT to compute the amount of coupon payment.

The value obtained is 55.

Therefore, the amount of coupon payment is $55.

Current yield is calculated using the below formula:

Current Yield= Annual interest/Current price

                         = $55*2/ $1,020

                = $110/ $1,020

                =0.1078*100

               = 10.78%.

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