Question

Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2018.

Company (Ticker)

Coupon

Maturity

Last Price

Last Yield

EST Vol (000s)

IOU (IOU)

5.1

Apr 19, 2034

106.85

??

1,833

a. What is the yield to maturity of the bond?

b. What is the current yield?

a. YTM ____%

b. current yield ___%

Answer 1

a.Information provided:

Face value= future value= $2,000

Current price= present value= 106.85%*$2,000 = $2,137

Time= April 19,2034 - April 19,2018 = 16 years

Coupon rate= 5.1%

Coupon payment= 0.051*2,000= $102

The question is solved by calculating the yield to maturity.

Enter the below in a financial calculator to compute the before tax cost of debt:

FV= 2,000

PV= -2,137

N= 16

PMT= 102

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 4.4907.

Therefore, the yield to maturity is 4.49%.

b.Current yield is calculated using the below formula:

Current Yield= Annual interest/ Current price

= $102 / $2,137

= 0.0477*100

= 4.77%.

In case of any query, kindly comment on the solution.