Question

ABC Enterprises’ bonds currently sell for $1,100. They have a 5-year maturity, an 8% coupon rate with interest paid semi–annually, and a par value of $1,000. What is their current yield? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

Answer 1

Information provided:

Par value= future value= $1,000

Current price= present value= $1,100

Time= 5 years*2= 10 semi-annual periods

Coupon rate= 8%/2= 4%

Coupon payment= 0.04*1,000= $40

Current yield is calculated using the below formula:

Current Yield= Annual interest/Current price

Current yield= $80/ $1,100

                    = 0.0727*100

                    = 7.27%.

Therefore, the current yield is 7.27.

In case of any query, kindly comment on the solution.