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Problem 5-03 Current Yield for Annual Payments Heath Food Corporation’s bonds have 22 years remaining to...

Problem 5-03

Current Yield for Annual Payments

Heath Food Corporation’s bonds have 22 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 8%. They pay interest annually and have a 12% coupon rate. What is their current yield? Round your answer to two decimal places.

_____%

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Answer #1

Annual coupon=1000*12%=120

Hence current value=Annual coupon*Present value of annuity factor(8%,22)+$1000*Present value of discounting factor(8%,22)

=120*10.20074366+$1000*0.183940507

=$1408.03(Approx)

Hence current yield=Annual coupon/Current price

=(120/1408.03)=8.52%(Approx).

NOTE:

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

=120[1-(1.08)^-22]/0.08

=120*10.20074366

2.Present value of discounting factor=1000/1.08^22

=$1000*0.183940507

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