Question

Dexter Mills issued 20-year bonds a year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 9.2 percent, what is the current yield of the bond?

               

Question 33 options:

	10.35%
	10.28%
	9.79%
	9.37%
	9.29%

Answer 1

Information provided:

Par value= future value= $1,000

Time= 20 years*2= 40 semi-annual periods

Coupon rate= 10.20%/2= 5.10%

Coupon payment= 0.0510*1,000= $51

Yield to maturity= 9.20%/2= 4.60% per semi-annual period

The question is solved by first calculating the current price of the bond.

The current price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 40

PMT= 51

I/Y= 4.60

Press the CPT key and PV to compute the present value.

The value obtained is 1,089.02.

Therefore, the current price of the bond is $1,089.02.

Current yield is calculated using the below formula:

Current Yield= Annual interest/Current price

                          = $102/ $1,089.02

                        = 0.0937*100

                          = 9.37%.

Hence, the answer is option d.

In case of any query, kindly comment on the solution.