Question

You own a bond that has a 6 percent annual coupon and matures 5 years from now. You purchased this 10- year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?a. The current yield-to-maturity is greater than 6 percent.
b. The current yield is 6 percent.
c. The next interest payment will be $30.
d. The bond is currently valued at one-half of its issue price.
e. You will realize a capital gain on the bond if you sell it today.

Answer 1

Answer:

b. The current yield is 6 percent.

Explanation:

Using a financial calculator, input the following to find the price of this bond today;

N= 5

FV = 1,000

I = 5.8%

Coupon payment; PMT = 6%*1000 = 60

then compute price; CPT PV = 1008.47

Current yield = Coupon PMT / Current price

Current yield = 60/1008.47 = 0.059 or 6% rounded to the nearest whole number. This makes choice B correct.