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Bonds currently sell for $900, a 6-year maturity, and an annual coupon of $90, and par...

Bonds currently sell for $900, a 6-year maturity, and an annual coupon of $90, and par value = $1,000. What is the current yield?

a.   10.00%

b.   11.50%

c.    9.88%

d.   12.27%

Solutions

Expert Solution

Yield to Maturity = [Coupon + Pro-rated Discount]/[(Purchase Price + Redemption Price)/2]

Where,

Coupon = 90

Pro Rated Discount = [(Redemption Price-Purchase Price)/Period to Maturity] = [(1000-900)/6] = 16.6667

Redemption Price (assuming at par) = 1000

Therefore, YTM = [90+16.6667]/[(900+1000)/2] = 106.6667/950 = 0.11228 which is equivalent to 11.5%

jeff jeffy answered 2 years ago
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