Question

Susan Wilson wants to invest in four-year bonds that are currently priced at $868.90. These bonds...

Susan Wilson wants to invest in four-year bonds that are currently priced at $868.90. These bonds have a coupon rate of 6.1 percent and make semiannual coupon payments. What is the current market yield on this bond? (Round intermediate calculations to 5 decimal places, e.g. 1.25145 and final answer to 2 decimal places, e.g. 15.25%.)

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Answer #1

The current market yield reflects the profitability of a bond. `We can calculate it by the following formula,

Current yield = Annual coupon payment / Current Bond Price

Bond price = $868.90

Annual coupon payment = 6.1% of 1000 = 61

Current yield = 61 / 868.9 = 7.02%

The current yield is greater than the annual coupon rate, hence the bond is trading at a discount.

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