Question

• Initially, the bond was sold for the premium price of $1,025.
• On October 15, 2020, this bond was selling for only $975.
• The market rate of interest for a riskless corporate bond, of this maturity, was 4.5% on October 15, 2016, which reflects market expectations about future rates of inflation.
• The market rate of interest for a riskless corporate bond, of this maturity, was 4.0% on October 15, 2020, which reflects market expectations about future rates of inflation.

A-What was the nominal yield on this bond on October 15, 2020? [To 1 decimal place.]

B-What was the current yield on this bond on October 15, 2020? [To 2 decimal place.]

C-What was the yield to maturity for this bond on October 15, 2020? [To 3 decimal places.]

Answer 1

1.   Face value = 1000 $

Annual coupon payment = 60 $

Nominal Yield = Annual coupon payment / Bond Face value * 100

(Nominal Yield is always calculated on Face value of the bond)

= 60 / 1000 * 100

= 6 %

2.

Current Yield on October 15, 2020 = Coupon Payment / Current Market Bond Price on 2020 * 100

= 60 / 1118.69 * 100

= 5.36 %

3. bond price on October 15, 2020 = 975

Face value of bond = 1000

Copon payment = 60 $

Time = 10 Year

Yield to maturity =

= [C+ (F-P) / n] / [(F+P) / 2]  

Where C = Coupon payment

F = Face value of the bond

P = Current Price of bond

N = Number of years

= [60+ (1000-975) / 10] / [(1000+975) / 2]

= 62.5 / 987.5

= 6.346%