Question

An ABC Corp bond carries an 8 percent coupon paid quarterly. The par value of the bond is $1,000 and the bond has six years to mature. If the bond is currently selling at $925, what are its Current Yield and Yield to Maturity, respectively?

Answer 1

Current Yield = Annual Coupon / Current Price *100

= (Face Vale * Coupon rate ) / Current Price *100

= (1000*8%)/925*100

= 8.65%

Answer = 8.65%

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The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

= [$ 20+ ( $ 1,000- $ 925) /(6*4)] /[( $ 1,000+ $ 925)/2] *100

= 23.125/962.5*100

= 2.402597403%

Annual YTM =  2.402597403%*4

=9.61%

Note : Quarterly Coupon = Rate * Face Value

= 8% /4 * $ 1,000

= $ 80/4

= $ 20

Since this formula gives an approximate value, the financial calculators can be used alternatively.

where,

Par Value = $ 1,000

Market Price = $  925

Annual rate = 8% and

Maturity in Years = 6 Years

Payments = Quarterly

Hence the yield to maturity = 9.66%

Answer = 9.66%