Suppose the following bond quote for IOU Corporation appears in the financial pa

Question

Suppose the following bond quote for IOU Corporation appears in the financial page of today's newspaper. Assume the bond has a face value of $1,000, and the current date is April 15, 2013 Company Ticker) Ou (IOU) Coupon 8.90 Maturity Apr 15, 2033 Last Price 91.645 Last Yield EST Vol (000s) 1,838 Requirement 1: What is the yield to maturity of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Yield to maturity Requirement 2: What is the current yield? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Current yield

Explanation / Answer

Maturity=20 years

Current Yield=89/916.45=9.7114%

As we are not given whether coupons are semi-annual or annual, I am giving both the cases

Case 1: Semi-annual coupon

Coupon=8.9%*1000/2=44.5

Price=44.5/(1+ytm/2)+44.5/(1+ytm/2)^2......44.5/(1+ytm/2)^40+1000/(1+ytm/2)^40

=>91.645%*1000=44.5/(1+ytm/2)+44.5/(1+ytm/2)^2......44.5/(1+ytm/2)^40+1000/(1+ytm/2)^40

=>ytm=9.86483255287666%

Case 2: Annual coupon

Coupon=8.9%*1000=89

Price=89/(1+ytm)+89/(1+ytm)^2......89/(1+ytm)^20+1000/(1+ytm)^20

=>91.645%*1000=89/(1+ytm)+89/(1+ytm)^2......89/(1+ytm)^20+1000/(1+ytm)^20

=>ytm=9.8729%

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