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)

6.6

Apr 15, 2029

104.065

??

1,839

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

YTM              %

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

Current yield              %

Answer 1

Yield to Maturity [YTM] of the Bond

Yield to Maturity [YTM] = Coupon Amount + [(Par Value – Bond Price) / Maturity Years] / [(Par Value + Bond Price)/2]

Par Value = $1,000

Coupon Amount = $66 [$1,000 x 6.60%]

Bond Price = $1,040.65 [$1,000 x 104.065%]

Maturity Years = 13 Years [April 15, 2016 to Apr 15, 2029]  

Therefore, Yield to Maturity [YTM] = Coupon Amount + [(Par Value – Bond Price) / Maturity Years] / [(Par Value + Bond Price)/2]

= [$66 + {($1,000 – $1,040.65) / 13 Years)] / [($1,000 + $1,040.65) / 2}]

= [($66 - $3.13) / $1,020.33]

= [$62.87 /$1,020.33]

= 0.0614

= 6.14%

“Yield to Maturity [YTM] of the Bond = 6.14%”

Current Yield of the Bond

Current Yield of the Bond = [Coupon Amount / Bond Price] x 100

= [$66 / $1,040.65] x 100

= 6.34%

“Current Yield of the Bond = 6.34%”