Question

A bond has $1,000 face value, coupon rate of 3.5%, and yield to maturity (YTM) of 3.7%. It will mature in 16 years and the interest rate will compound annually. What is this bond’s current yield?

Answer 1

Annual coupon=1000*3.5%=35

Hence current price=Annual coupon*Present value of annuity factor(3.7%,16)+1000*Present value of discounting factor(3.7%,16)

=35*11.9144623+1000*0.559164895

=$976.171076(Approx)

Current yield=Annual coupon/Current price

=35/976.171076

=3.59%(Approx)

NOTE:

1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=35[1-(1.037)^-16]/0.037

=35*11.9144623

2.Present value of discounting factor=1000/1.037^16

=1000*0.559164895