Question

A bond matures in 15 years and pays an 8 percent annual coupon. The bond has a face value of $1,000 and currently sells for $985. What is the bond’s current yield and yield to maturity?

Answer 1

Current yield = Annual coupon payment / Current Market Price

= ($ 1000*8%) / $ 985 *100

= $ 80/ $ 985 *100

= 8.12%

Answer = 8.12%

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The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

= [$ 80+ ( $ 1,000- $ 985) / 15 ] /[( $ 1,000+ $ 985)/2] *100

= 81/992.50*100

= 8.16%

Note : Coupon = Rate * Face Value

= 8% * $ 1,000

= $ 80

Since this formula gives an approximate value, The financial calculators can be used alternatively , where,

Par Value = $ 1,000

Market Price = $  985

Annual rate = 8% and

Payments = 1

Maturity in Years = 15 Years

Hence, the yield to maturity = 8.18%

Answer = 8.18%

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