Question

Bonds issued by XYZ have a par value of $1000, were priced at $1,140.00 six months...

Bonds issued by XYZ have a par value of $1000, were priced at $1,140.00 six months ago, and are priced at $1,060.00 today. The bonds pay semi-annual coupons and just made a coupon payment. If the bonds had a percentage return over the past 6 months (from 6 months ago to today) of -2.10%, then what is the current yield of the bonds today?

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Homework Answers

Answer #1

We need to calculate the coupon payment of the bond using the percentage return formula

Percentage return = (Current price - Price of bond 6 months ago + Coupon payment)/Price of bond 6 months ago

where

Percentage return = -2.10%

Current price = 1060

Price of bond 6 months ago = 1140

Substituting the given values, we get

-2.10% = (1060 - 1140 + Coupon payment)/1140

-0.021 = (-80 + Coupon payment)/1140

-0.021*1140 = (-80 + Coupon payment)

-23.94 = -80 + Coupon payment

Coupon payment = 80 - 23.94

Coupon payment = 56.06

Now, we find the current yield of the bond using the formula,

Current yield = Coupon payment/Current price

Current yield = 56.06/1060

Current yield = 0.0529 or 5.29%

Therefore, current yield of the bond today is 5.29%

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