Question

Messenger, Inc. bonds have a 4% coupon rate with annual coupon payments and a $1,000 par value. The bonds have 15 years until maturity, and expected to yield 4.90%. What is the current yield for Messenger's bonds?

4.51%

4.33%

4.42%

4.16%

Answer 1

Price of the bond = Present Value of Coupons and Face Value

Face Value = 1000

Coupon Amount = 0.04*1000 = 40

YTM = 4.9%

Maturity = 15 years

Price of the bond = 40/(1+0.049)^1 +40/(1+0.049)^2 +40/(1+0.049)^3 +40/(1+0.049)^4 +40/(1+0.049)^5 +40/(1+0.049)^6 +40/(1+0.049)^7 +40/(1+0.049)^8 +........40/(1+0.049)^15 +1000/(1+0.049)^15

Price of the bond = 905.95 Answer

Current Yield = (Coupon Amount / Price of bond )* 100

= ( 40 /905.95 ) *100 = 4.42% Answer

Third option is correct.