Question

Suppose the following bond quote for IOU Corporation appears in the financial page of today’s newspaper. Assume the bond has a face value of $1,000, and the current date is April 15, 2016. Company (Ticker) Coupon Maturity Last Price Last Yield EST Vol (000s) IOU (IOU) 7.50 Apr 15, 2040 91.715 ?? 1,845

What is the yield to maturity of the bond? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Yield to maturity % =

What is the current yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Current yield % =

Answer 1

Answer a.

Face Value = $1,000

Current Price = 91.715% * $1,000
Current Price = $917.15

Annual Coupon Rate = 7.50%
Semiannual Coupon Rate = 3.75%
Semiannual Coupon = 3.75% * $1,000
Semiannual Coupon = $37.50

Time to Maturity = 24 years
Semiannual Period to Maturity = 48

Let Semiannual YTM be i%

$917.15 = $37.50 * PVIFA(i%, 48) + $1,000 * PVIF(i%, 48)

Using financial calculator:
N = 48
PV = -917.15
PMT = 37.50
FV = 1000

I = 4.15%

Semiannual YTM = 4.15%
Annual YTM = 2 * 4.15%
Annual YTM = 8.30%

Answer b.

Annual Coupon = 2 * Semiannual Coupon
Annual Coupon = 2 * $37.50
Annual Coupon = $75

Current Yield = Annual Coupon / Current Price
Current Yield = $75 / $917.15
Current Yield = 0.0818 or 8.18%