Question

Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2015. Company (Ticker) Coupon Maturity Last Price Last Yield EST Vol (000s) IOU (IOU) 8 Apr 19, 2028 104.76 ?? 1,846 What is the yield to maturity of the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) YTM % What is the current yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Current yield %

Answer 1

Answer a.

Face Value = $2,000
Current Price = 104.76%*$2,000
Current Price = $2,095.20
Annual Coupon Rate = 8.00%
Semi-annual Coupon Rate = 4.00%
Semi-annual Coupon = 4.00%*$2,000 = $80
Semi-annual Period to Maturity = 26

Let Semi-annual YTM be i%

$2,095.20 = $80 * PVIFA(i%, 26) + $2,000 * PVIF(i%, 26)

Using financial calculator:

N = 26
PV = 2095.20
FV = 2000
PMT = 80
I = 3.71%

Semi-annual YTM = 3.71%
Annual YTM = 2*3.71% = 7.42%

Answer b.

Current Yield = Annual Coupon / Current Price
Current Yield = $160 / $2,095.20
Current Yield = 7.64%