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 $2,000, and the current date is April 15, 2019. Company (Ticker) Coupon Maturity Last Price Last Yield EST Vol (000s) IOU (IOU) 7.55 Apr 15, 2035 92.979 ?? 101 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

a.Information provided:

Face value= future value= $2,000

Market price= present value= 92.979%*$2,000 = $1,959.58

Time= April 15, 2035 - April 15, 2019 = 16 years

Coupon rate= 7.55%

Coupon payment= 0.0755*2,000= $151

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 2,000

PV= -1,959.58

N= 16

PMT= 151

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 7.7751

Therefore, the yield to maturity is 7.78%.

b.Current yield is calculated using the below formula:

Current Yield= Annual interest/ Current price

= $151 / $1,959.58

= 0.0771*100

= 7.71%.