Question

1- A bond is priced in the market at $1,150 and has a coupon of 8%. Calculate the bond’s

current yield.

2- A $1,000 par value bond with a 7.25% coupon rate (semiannual interest) matures in seven

years and currently sells for $987. What is the bond’s yield to maturity and bond equiva-
lent yield?

3- You notice in the WSJ a bond that is currently selling in the market for $1,070 with a

coupon of 11% and a 20-year maturity. Using annual compounding, calculate the prom-
ised yield on this bond.

Answer 1

1). Current Yield = Annual Coupon Payment / Current Bond Price = $80 / $1,150 = 0.0696, or 6.96%

2). To find the YTM, we need to put the following values in the financial calculator:

INPUT	7*2=14		-987	(7.25%/2)*1,000=37.5	1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT		3.87

Hence, YTM = 2r = 2 x 3.87 = 7.74%

BEY = [1 + (YTM/m)]^m - 1

= [1 + (0.0774/2)]² - 1 = 1.0789 - 1 = 0.0789, or 7.89%

3). To find the YTM, we need to put the following values in the financial calculator:

INPUT	20		-1,070	11%*1,000=110	1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT		10.17

Hence, YTM = 10.17%