Question

A $1000 bond with a coupon rate of 6.2% paid semiannually has eight years to maturity and a yield to maturity of 8.3%. If interest rates rise and the yield to maturity increases to 8.6%, what will happen to the current yield of the bond?

1. 	A.	The current yield will decrease by 0.129%.
   	B.	The current yield will increase by 0.3%.
   	C.	The current yield will decrease by 0.3%
   	D.	The current yield will increase by 0.129%.

Answer 1

Computation Of Bond Current Price
a	Semi-annual Interest Amount	$       31.00
	($1000*6.2%/2)
b	PV Annuity Factor for (16 Years,4.15%)	11.524410
c	Present Value Of Annual Interest (a*b)	$     357.26
d	Redemption Value	$ 1,000.00
e	PV Factor Of (16 Years,4.15%)	0.52174
g	Present Value Of Redemption Amount (d*e)	$     521.74
f	Price Of The Bond (c+g)	$     878.99
Current yield = copoun amount / price
=$62/878.99
=7.054%	0.070535501
Computation Of Bond Price
a	Semi-annual Interest Amount	$       31.00
	($1000*6.2%/2)
b	PV Annuity Factor for (16 Years,4.3%)	11.398601
c	Present Value Of Annual Interest (a*b)	$     353.36
d	Redemption Value	$ 1,000.00
e	PV Factor Of (16 Years,4.3%)	0.50986
g	Present Value Of Redemption Amount (d*e)	$     509.86
f	Price Of The Bond (c+g)	$     863.22
Current Yield = $62/863.22
=7.182%
Difference = 7.182-7.054
=0.129 increased
Correct Option : D.The current yield will increase by 0.129%.