Question

Whitesell Athletic Corporation's bonds have a face value of $1,000 and a 9% coupon paid semiannually; the bonds mature in 8 years. What current yield would be reported in The Wall Street Journal if the yield to maturity is 8%?

Answer 1

Current yield = (Coupon rate / Price of bond) *100

Coupon rate = 9% % p.a. compounded semiannually

Present Value of Bond = (C/r)*[1-(1/(1+r)t] + F/(1+r)t

where C is coupon amount = 9% of 1000 = 45 every six months

r is YTM rate = 8%/2 semi annually =0.04

t is no. of periods = 8*2 = 16

F is face value = 1000

Therefore Price of bond should be = (45/0.04)*[1-(1/(1.04)¹⁶] + 1000/(1.04)¹⁶

= 524.35 + 533.91

= 1058.26

Hence, current yield = (45/1058.26) * 100* 2

= 8.50 % p.a. compounded semi annually

*** Price of bond is not given therefore intrinsic value of the bond is taken

If Price = 1000 (i.e., Face Value)

then current yield will be 45*100*2/1000 = 9% which is simply the coupon rate