1. In the USA: If the price of a $100 face value one-year bond is $105 and the c
ID: 2506225 • Letter: 1
Question
1. In the USA: If the price of a $100 face value one-year bond is $105 and the coupon is $10, what is the current yield?
2. Considering number 1 above, has the price of the bond risen or declined from the date it was originally issued?
3. Considering number 1, above, has the interest rate gone up or down since the bond was issued?
4. How will investment spending react to the result you determined in 3 above?
5. Considering your answer to question 3, describe what will happen to the capital account in the balance of payments as a result.
6. Considering your answer to question 3, describe what will happen in the foreign exchange market as a result.
Explanation / Answer
Current yield is the annual dollar amount of the interest divided by the current market price. But your question is written in a confusing manner.
You list "coupon" as $10. Coupon should be listed as an annual interest rate, an annual percentage of the face value, not as a dollar value. This leads me to believe that the $10 could either be the amount of each interest payment, which is normally quarterly for corporate bonds and semi-annually for Treasury Notes, which could have a one-year maturity; or the $10 could be the result of the stated interest as an annual amount: in other words, $10 per year.
Since it doesn't say what kind of bond it is, I assume that the $10 is the annual amount. That would mean that the bond yields $10 on a price of $105, making the current yield 9.52%. If the $10 were semi-annual payments, the current yield would be $4.7%.
Without more information to clarify, my best assumption would be that they want you to use the 9.52% figure.
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