On October 15, 2016, Koala, Inc. issued a 10 year bond (with a typical $1000 face...

On October 15, 2016, Koala, Inc. issued a 10 year bond (with a typical $1000 face value) that had an annual coupon value of $60. [We are assuming that the 2020 coupon has just been redeemed.]

• Initially, the bond was sold for the premium price of $1,025.

• On October 15, 2020, this bond was selling for only $975.

• The market rate of interest for a riskless corporate bond, of this maturity, was 4.5% on October 15, 2016, which reflects market expectations about future rates of inflation.

• The market rate of interest for a riskless corporate bond, of this maturity, was 4.0% on October 15, 2020, which reflects market expectations about future rates of inflation.

Question- What was the current yield on this bond on October 15, 2020? [To 2 decimal place.]

Solutions

Expert Solution

Answer :-

Current yield on bond = annual coupon value/ current market price × 100

Current yield on bond = 60 / 975 × 100

Current yield on bond = 6.15%

Rahul Sunny answered 1 year ago

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