Question

A coupon bond pays annual interest, has a par value of $1,000, matures in four years, has a coupon rate of 10%, and has a yield to maturity of 12%. The current yield on this bond is

Answer 1

Annual coupon=1000*10%=100

Hence current price=Annual coupon*Present value of annuity factor(12%,4)+$1000*Present value of discounting factor(12%,4)

=$100*3.037349347+$1000*0.635518078

=$939.25(Approx)

Hence current yield=Annual coupon/Current value

=(100/939.25)=10.65%(Approx).

NOTE:

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

=100[1-(1.12)^-4]/0.12

=$100*3.037349347

2.Present value of discounting factor=1000/1.12^4

=1000*0.635518078