A bond has $1,000 face value, coupon rate of 5.6%, and yield to maturity (YTM) of 5.8%. It will mature in 15 years and the inter
1 answer:
Answer:
Current Yield of the bond = 0.057134 or 5.7134% rounded off to 5.71%
Explanation:
A current yield refers to the annual return that a security provides based on the interest or dividend payments it makes expressed as a percentage of it current price. Thus, the current yield on bond can be calculated as follow,
Current Yield - bond = Interest payment per year / Current price
To calculate the current yield, we need the present value or current price of the bond.
To calculate the price of the bond today, we will use the formula for the price of the bond. We assume that the interest rate provided is stated in annual terms. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,
Coupon Payment (C) = 1000 * 0.056 * 6/12 = $28
Total periods (n) = 15 * 2 = 30
r or YTM = 0.058 * 6/12 = 0.029 or 2.9%
The formula to calculate the price of the bonds today is attached.
Bond Price = 28 * [( 1 - (1+0.029)^-30) / 0.029] + 1000 / (1+0.029)^30
Bond Price = $980.143753 rounded off to $980.14
Current Yield of the bond = (28 * 2) / 980.14
Current Yield of the bond = 0.057134 or 5.7134% rounded off to 5.71%
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