Question

Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $1,000 and the current date is April 19, 2012.

Company (Ticker)

Coupon

Maturity

Last Price

Last Yield

EST Vol (000s)

IOU (IOU)

6.2

Apr 19, 2028

108.96

??

1,827

1. What is the yield to maturity of the bond?

2. What is the current yield?

Answer 1

1

Assuming semi annual payments

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =16x2

1089.6 =∑ [(6.2*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^16x2

k=1

YTM% = 5.36

2

current yield = coupon rate*par value/current price

Current yield%=(6.2/100)*1000/1089.6

Current yield% = 5.69