Question

Bond P is a premium bond with a coupon rate of 8.2 percent. Bond D is a discount bond with a coupon rate of 4.2 percent. Both bonds make annual payments, have a YTM of 6.2 percent, and have seven years to maturity. Requirement 1: What is the current yield for bond P

Answer 1

The current yield for bond P is 5.38%.

Current value of bond =  Face value/(1+ YTM)^n

Assuming the face value of the bond is $1,000 and substituting the values in the formula we get,

Current value of bond  =$1,000/((1+6.2%)^7)                   

                                      =$1,523.60

Annual coupon payment of Bond P = par value x coupon rate

Substituting the values in the formula we get,

Annual coupon payment of Bond P = $1,000 x 8.2%                                                                                                    = $82

The current yield of bond = annual coupon payment/ current value of bond

Substituting the values in the formula we get,

Current yield of bond = $82/ $1,523.60                                  

                                    = 5.38%

Hence,  the current yield for bond P is 5.38%.

Learn more about YTM:

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