Question

What is the current yield for a Bond with a $1,000 par value bond, with an 10% annual coupon that matures in 15 years if the interest rate is 8%?

(Answer as a whole number percentage - i.e. 7.25, not 0.0725)

Answer 1

Annual coupon=1000*10%=100

Hence current price=Annual coupon*Present value of annuity factor(8%,15)+1000*Present value of discounting factor(8%,15)

=100*8.55947869+1000*0.315241705

=$1171.18957(Approx)

Current yield=Annual coupon/Current price

=100/1171.18957

=8.54%(Approx)

NOTE:

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

=100[1-(1.08)^-15]/0.08

=100*8.55947869

2.Present value of discounting factor=1000/1.08^15

=1000*0.315241705

answered by: anonymous