Question

The State of Adaven issued $50 million of perpetual bonds in 1990. The bonds were issued in $100 denominations with an annual coupon interest rate of 5%. Determine the rate of return or current yield on these bonds if they are purchased at the current price of $40.a. 12.5%.b. 8.0%.c. 5.0%.d. 1.25%.

Answer 1

Answer: 12.5%

Explanation:

From the question, we are informed that the State of Adaven issued $50 million of perpetual bonds in 1990 and that the bonds were issued in $100 denominations with an annual coupon interest rate of 5%.

The rate of return or current yield on these bonds if they are purchased at the current price of $40 will be calculated as:

= (5% × $100)/$40

= $5/$40

= 0.125 or 12.5%