A bond with a face value of $1,000 has 14 years until maturity, carries a coupon

Question

A bond with a face value of $1,000 has 14 years until maturity, carries a coupon rate of 8.6%, and sells for $1,104.

a. What is the current yield on the bond? (Enter your answer as a percent rounded to 2 decimal places.)

b. What is the yield to maturity if interest is paid once a year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 4 decimal places.)

c. What is the yield to maturity if interest is paid semiannually? (Do not round intermediate calculations. Enter your answer as a percent rounded to 4 decimal places.)

Explanation / Answer

a.

CY = Annual interest payment / Current Bond Price

= $1000 * 8.6% / $1104

= 7.789%

b.

YTM = [Coupon payment + (Face value - Price) / No of periods] / [(Face value + Price) / 2 ]

= [$1000*8.6% + ($1000-$1104)/14] / [($1000+$1104)/2]

= [$86-$7.428]/$1052

= 7.468%

c.

YTM = [Coupon payment + (Face value - Price) / No of periods] / [(Face value + Price) / 2 ]

= [$1000*4.3% + ($1000-$1104)/28] / [($1000+$1104)/2]

= [$43-$3.71428]/$1052

= 3.73%

Note : Semi annual coupon rate = 4.3%(8.6%/2)

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