Question

Brown Enterprises' bonds earn a 7.60 percent yield to maturity. They have a 20-year maturity, and an annual coupon rate of 8 percent. Coupons are paid semiannually. What is their current yield?

	a.	9.20%
	b.	7.90%
	c.	7.64%
	d.	7.69%
	e.	9.00%

Answer 1

Information provided:

Yield to maturity= 7.60%/2= 3.80% per semi-annual period

Time= 20 years*2= 40 semi-annual periods

Coupon rate= 8%/2= 4%

Coupon payment= 0.04*1,000= $40

The question is solved by first calculating the current value of the bond.

The present value is computed to calculate the current value of the bond.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

I/Y= 3.80

N= 40

PMT= 40

Press the CPT key and PV to compute the present value.

The value obtained is 1,040.79.

Hence, the current value of the bond is $1,040.79.

Current yield is computed using the below formula:

Current Yield= Annual interest/Current price

                         = $40*2/ $1,040.79

                        = $80/ $1,040.79

                       = 0.0769*100

                      = 7.69%.

Hence, the answer is option d.

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