Question

# 1. One year ago, a bond had a coupon rate of 10.5 percent, par value of...

1. One year ago, a bond had a coupon rate of 10.5 percent, par value of \$1000, YTM of 7.96 percent, and semi-annual coupons. Today, the bond’s price is 916.6 and the bond has 6 years until maturity. What was the current yield of the bond one year ago? The next coupon is due in 6 months. Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Current yield one year ago= Annual coupon/Price of the bond year ago

Price of bond one year ago needs to be found using PV function in EXCEL

=PV(rate,nper,pmt,fv,type)

Please remember, the payments are semi-annual.

rate=YTM/2=7.96%/2=3.98%

nper=number of periods=2*7=14 (one year ago, the maturity time would be 7 years)

pmt=semi-annual coupon payment=(coupon rate*face value)/2=(10.5%*1000)/2=105/2=52.5

fv=1000

=PV(3.98%,14,52.5,1000,0)=\$1134.33

PV=Price of the bond year ago=\$1134.33

Current yield one year ago= Annual coupon/Price of the bond year ago=105/\$1134.33=9.26% (0.0926)

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