Question

Malko enterprises' bonds currently sell for $1,050. they have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. what is their current yield?

a. 8.68%
b. 7.88%
c. 7.14%
d. 8.27%
e. 7.50%

Answer 1

Since you're paying 5% more than par value for the bond, you might expect the yield to be the nominal yield (7.5%) divided by that premium:

... 7.5% / 1.05 = 7.14%

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However, the internal rate of return for an outlay of 1050 and an income stream of 75×6 with 1000 added to the last coupon is 6.47%.

We believe the correct choice is not among those offered.