Question

• Don't put percent sign (%) into the blank and show the final answer only. Eg. If your answer is 13.6%, please only put 13.6 into the blank
• Don't show any supporting work in the blank.

Consider a $1,000 par value bond with a 7.8 percent annual coupon. The bond pays interest annually. There are 9 years remaining until maturity. Assuming that the required return on the bond is 10 percent, the current yield on the bond is ____________ %

Answer 1

Current yield is the annual income for an investment divided by the current price of the security. Current yield is the return that the investor would expect to earn if he purchases the bond and holds it for a year. Current yield is not the actual return if he keeps the bond until maturity. Current yield does not take into account the time value of money.

Current yield = Annual Cash inflow / Market price

Now we have to calculate the market price first

So,

Face value:FV = $1000

Annual coupon payment: PMT=$78

Time to maturity: N= 9

I/Y = 10%

Put all these values in financial calculator we get

PV = $873.30

Now current yield = 78 / 873.30 =8.931%