Question

Q1) Consider a coupon bond with an annual coupon payment C = $100, a face value F = $3, 000, and a maturity date January 1, 2012. Suppose you BUY this bond on January 1, 2007 for $2500 and you SELL it on January 1, 2008 for $3000. Which of the following statements are TRUE for this bond:

a. Your (annual) current yield is 0.04 (1/25).

b. Your return rate is your current yield plus the rate of your capital gain or loss.

c. Your return rate is MORE than your current yield.

d. All of the above are true.

e. Only A and B are true

Q2) If a coupon bond with an $8000 face value and a 5 year maturity has a $400 coupon payment and a purchase price of $10,000, then the CURRENT YIELD is

a. 4 percent

b. 5 percent

c. 8 percent

d. 10 percent

(PLEASE EXPLAIN)

Answer 1

Answer 1.)

The formula for Current Yield is = Annual coupon payments/Market price of the Bond

Coupon payment = $100

Purchase price of bond = $2500

Current yield = 100/2500 = 0.04 or 1/25

So option A is correct

Return rate or percentage rate of return consists of an interest yield plus a capital gains yield

So Option B is correct also

And if we see the return we purchased at $2500 at sold at $3000 so definitely it is capital gains so our actual rate of return will be more than the current yield so option C will be true

All the options are correct and the correct answer is Option D

Answer 2.)

The formula for Current Yield is = Annual coupon payments/Market price of the Bond

So Coupon payment is given as $400

and the Purchase price is $10000

So Current Yield = 400/10000 = 4%

So Option A will be the answer.