Question

Preston corporation has a bond outstanding with an annual interest payment of $100, the market price of $1310, and maturity date in 10 years. Assume the par value of the bond is $1000.

A. Coupon Rate

B. Current Yield

C. Approximate Yield to maturity

D. Exact Yield to Maturity

Answer 1

a) Annual interest payment is $100, coupon rate would be interest rate/par value = 100/1000 = 10%

b) The current yield is equal to the annual interest divided by the current price of the bond.
So, current yield = 100/1310 = 0.076 or 7.6%

c) Approximate YTM = (Coupon+ (Face value-Current price)/10)/(Face value+Current price)/2

So, it comes out to be 5.974%

d) Exact YTM: For this we need some trial and error on present value formula

Current Price = Coupon payment * (1- (1+YTM)^-n)/YTM + Par value * (1+YTM)^-n

1310 = 100*(1- (1+YTM)^-10)/YTM + 1000 * (1+YTM)^-10

YTM	RHS	LHS
6%	1153.27	1310
5.5%	1201.7	1310
5%	1253.19	1310
4.48%	1310	1310