%3Cp%20class%3D%22MsoNormal%22%3E%3Co%3Ap%3E%26nbsp%3B%3C%2Fo%3Ap%3E%3C%2Fp%3E%3
ID: 2708136 • Letter: #
Question
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1) The formula for compouned return you need is y = (1 + r) ^ n. So for this case, 2 = (1 + 0.18) ^ n. (2 b/c you are looking to double your money).
A rough estimate to figure out the answer is to use rule of 72. Which says time to double is 72 / rate of return. 72 / 18 = 4.
Exact answer is 4.19 years. 2 = (1.18) ^ 4.19
2)
Current yield is simply the coupon divided by the current price.
Coupon is $85 (8.5% * 1000). So current yield = 85/930.16 = 9.14%
Yield to maturity can be solved quickly with a financial calculator but the tricky part is identifying the right inputs.
Inputs for Financial Calculator:
Present value (PV) = -$930.16 (current price of bond, be sure to use negative sign! this is what you would pay if you had to buy bond today)
Future value (FV) = $1,000 (how much you get for bond at maturity)
Payments (PMT) = $85 per year (the annual coupon on the bond is 8.5% times face value of $1000)
Number of payments (n) = 12 (tthere are 12 years left)
interest rate (i) = ? (this is the unknown you solve for)
If you punch the above into a financial calculator and solve for interest, you will find the yield to maturity is 9.50%
Thus final answer is 9.14% for current yield and 9.50% for yield to maturity.
Hope this help and best luck!
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