Question

The Pioneer Petroleum Corporation has a bond outstanding with an $80 annual interest payment, a market price of $800, and a maturity date in four years. Assume the par value of the bond is $1,000.  
    
Find the following: (Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
  

A. Coupon Rate?

B. Current Yield?

C-1. Approximate yield to maturity?

C-2. Exact yield to maturity?

Answer 1

a)

Coupon rate = (Coupon / face value) * 100

Coupon rate = (80 / 1000) * 100

Coupon rate = 8.00%

b)

Current yield = (Annual coupon / price) * 100

Current yield = (80 / 800) * 100

Current yield = 10.00%

c)

Approximate yield to maturity = [Coupon + (Face value - price) / n] / (Face value + price) / 2

Approximate yield to maturity = [80 + (1000 - 800) / 4] / (1000 + 800) / 2

Approximate yield to maturity = [130] / 900

Approximate yield to maturity = 0.1444 or 14.44%

d)

Exact yield to maturity = 15.01%

Keys to use in a financial calculator: FV 1000, PV -800, N 4, PMT 80, CPT I/Y