Question

A bond has a yield to maturity of 9.25 percent, a coupon of 7.25 percent paid semiannually, a $1,000 face value, and a maturity date 21 years from today. What is the current yield

Answer 1

The current yield of the bond which is determined as the annual coupon payment divided by the current bond price is  8.88%

There is a need to distinguish between yield to maturity, coupon rate as well as the current yield of a bond.

A yield to maturity is the rate of return a bondholder would earn on the investment if the bond is held to maturity, the coupon rate is the percentage of the par value payable to the bondholders in cash annually, on the other hand, the current yield means the annual coupon payment as a percentage of the current bond price.

Current yield=annual coupon/current bond price

annual coupon=coupon rate*par value

annual coupon=7.25%*$1000

annual coupon=$72.50

The bond price can be determined using a financial calculator which requires that the calculator be set to its end mode before making necessary inputs as shown thus:

N=42(number of semiannual coupons  in 21 years=21*2=42)

PMT=36.25(semiannual coupon=coupon rate*par value/2=7.25%*$1000/2)

I/Y=4.625(semiannual yield to maturity=9.25%/2=4.625%, without the % sign)

FV=1000(bond's par value of $1000)

CPT(press compute)

PV=$816.16

current yield=$72.50/$816.16

current yield=8.88%

Find in the link below, further guidance on the current yield:

brainly.com/question/12909555

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