Question

Your broker is offering you a bond at a price of 107% with an annual coupon of 7% which matures in 14 years.

1.What is its yield to maturity? (FORMAT: X.XX DO NOT SHOW PERCENTAGE SIGN)

2.What is this bond's current yield? (FORMAT: X.XX DO NOT SHOW PERCENTAGE SIGN.)

Answer 1

Answer of Part 1:

Face Value = $1,000
Current Price = 107%*$1,000 = $1,070

Annual Coupon Rate = 7%
Semiannual Coupon Rate = 3.50%
Semiannual Coupon = 3.50%*$1,000 = $35

Time to Maturity = 14 years
Semiannual Period to Maturity = 28

Let semiannual YTM be i%

$1,070 = $35 * PVIFA(i%, 28) + $1,000 * PVIF(i%, 28)

Using financial calculator:
N = 28
PV = -1,070
PMT = 35
FV = 1000

I = 3.12%

Semiannual YTM = 3.12%
Annual YTM = 2 * 3.12%
Annual YTM = 6.24%

Answer of Part 2:

Annual Coupon = $1,000 *7% = $70

Current Yield = Annual Coupon / Current Price
Current Yield = $70 / $1,070
Current Yield = 0.0654 or 6.54%