Question

Tallahatchie Technologies has a 9-year bond outstanding that pays $105 annually. The face value of each bond is $1,000 and the bond has a yield to maturity of 10.3 percent. What is the bond's current yield?

8.17%

7.22%

10.38%

9.43%

Answer 1

The bond's current yield is computed as shown below:

= Amount paid annually / current bond price

Current bond price is computed as shown below:

= Present value of amount paid annually + Present value of face value

= $ 105 / 1.103¹ + $ 105 / 1.103² + $ 105 / 1.103³ + $ 105 / 1.103⁴ + $ 105 / 1.103⁵ + $ 105 / 1.103⁶ + $ 105 / 1.103⁷ + $ 105 / 1.103⁸ + $ 105 / 1.103⁹ + $ 1,000 / 1.103⁹

= $ 1,011.381971

So, the bond's current yield will be as follows:

= $ 105 / $ 1,011.381971

= 10.38% Approximately

Feel free to ask in case of any query relating to this question