Question

A 10 yr 1000 bond semi annual interest sells at a price of $846.70 . The coupon rate is 4% what is the bonds yeild to maturity and what is the current yeild of this bond?

Answer 1

Yield to Maturity

The yield to maturity can be calculated with the use of Rate function/formula of EXCEL/Financial Calculator. The function/formula for Rate is Rate(Nper,PMT,-PV,FV) where Nper = Period, PMT = Payment (here, Coupon Payment), PV = Present Value (here, Current Bond Price) and FV = Future Value (here, Face Value of Bonds).

Here, Nper = 10*2 = 20, PMT = 1,000*4%*1/2 = $20, PV = $846.70 and FV = $1,000

Using these values in the above function/formula for Rate, we get,

Yield to Maturity (Rate) = Rate(20,20,-846.70,1000)*2 = 6.07%

____

Current Yield

The current yield is calculated as below:

Current Yield = Annual Interest/Current Bond Price*100 = (1,000*4%)/846.70*100 = 4.72%