Question

Rachael purchased a five year $4,750 bond below par value for $3,940 with a coupon of 2.9%. What was her yield?

Answer 1

Her yield was 0.035 or 3.5%.

Explanation:

Rachael purchased a five year bond = $4,750

Market value = $3,940

To calculate the bond yield, divide its coupon payment by the market value of the bond.

Coupon value = 2.9% of 4,750

= 0.029 × 4,750 = $137.75

Yield = Coupon (annual cashflow) / market value of the bond

137.75 ÷ 3,940 = 0.0346 rounded to 0.035

Her yield was 0.035 or 3.5%

Answer 2

yield is given by:
current yield=(annual cash flow)/(market price)
annual cashflow(coupon)= 2.9/100×4750=137.75
market price of the bond= $3940
thus the yield will be given by:
137.75/3940
=0.03496