An investor is considering purchasing a bond with a 5.79 percent coupon interest

Question

An investor is considering purchasing a bond with a 5.79 percent coupon interest rate, a par value of $1,000 and a market price of $967.73 The bond will mature in nine years. Based on this information, answer the following questions:

a. What is the bond's current yield?

b. What is the bond's approximate yield to maturity?

c. What is the bond's yield to maturity using a financial calculator?

Note: Assume coupon payments are paid annually

QUESTION - a. The bond's current yield is _____%.(Round to two decimal places.)

Explanation / Answer

ANSWER:

Current yield = (coupon/market price)*100

= ((1000*5.79/100)/967.73)*100

=5.98%

ytm can be determined by using a following equation

1000*5.79% *pvifa (ytm ,9) + 100* pvif ( ytm ,9 ) = 967.73

NOW USE INTERPOLATION FORMULA  

6 + [ { ( LOWER NPV) }(7-6)% ]/(NPV1 -NPV 2)

6+ 17.98(7-6) /17.98% - (- 46.5 )

6.27%

year cash flows pvf@7% amount pvf@ 6% AMOUNT 1 57.9 0.9346 54.1121 0.9434 54.62264 2 57.9 0.8734 50.5721 0.8900 51.53079 3 57.9 0.8163 47.2636 0.8396 48.61396 4 57.9 0.7629 44.1716 0.7921 45.86222 5 57.9 0.7130 41.2819 0.7473 43.26625 6 57.9 0.6663 38.5812 0.7050 40.81722 7 57.9 0.6227 36.0572 0.6651 38.50681 8 57.9 0.5820 33.6983 0.6274 36.32718 9 57.9 0.5439 31.4938 0.5919 34.27092 9 1000 0.5439 543.9000 0.5919 591.9 921.1319 985.718

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