Answer:
Current yield is 10.3%
Explanation:
Coupon payment = 1000 x 7% = $70 annually
Number of periods = n = 20 years
Yield to maturity = 11% annually
Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula
Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]
Price of the Bond = $70 x [ ( 1 - ( 1 + 11% )^-20 ) / 11% ] + [ $1,000 / ( 1 + 11% )^20 ]
Price of the Bond = $557.43 + $124.03 = $681.46
Current yield is the ration of coupon payment to the price of the bond.
Current Yield = Coupon Payment / Price of Bond = $70 / 681.46 = 0.1027 = 10.3%
