Dizzy Corp. bonds bearing a coupon rate of 6%, pay coupons annually, have 2 years remaining...

Dizzy Corp. bonds bearing a coupon rate of 6%, pay coupons annually, have 2 years remaining to maturity, and the yield to maturity is 11%. The current yield is ________%.

Expert Solution

The Price of the Bond

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
Here, the calculation of the Bond Price using financial calculator is as follows


Variables	Financial Calculator Keys	Figures

Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 6.00%]	PMT	60
Market Interest Rate or Yield to maturity on the Bond [11.00%]	1/Y	11
Maturity Period/Time to Maturity [2 Years]	N	2
Bond Price/Current market price of the Bond	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $914.37

Current Yield on the Bond

Therefore, the Current Yield on the Bond = [Annual Coupon amount / Market Price of the Bond] x 100

= [$60 / $914.37] x 100

= 6.56%

“Hence, the Current Yield on the Bond will be 6.56%”

jeff jeffy answered 1 year ago

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