Question

A company’s bonds currently sell for $1,200. The bonds have a 6-year maturity, a 6% coupon paid semi-annually, and a par value of $1,000. What is the bond’s current yield?

Answer 1

2.5%

Step-by-step explanation:

Please follow the below mentioned steps in order to calculate a bond's current yield.

Step 1: Calculate annual bond payment (par value × coupon rate).

Step 2: Divide result from step 1 with 2 in order to convert it into semi-annual terms.

Step 3: Then divide the result from step 2 upon current market price and convert into a percentage.

Solution from step 1 to 3:

- Annual bond payment = $1000 × 6%

ABP = $60

- Semi-annual bond payment = $60 ÷ 2

SABP = $30

- Bond's current yield = $30 ÷ $1200 × 100

BCY = 2.5%