Question

"Use the internet to research and download a set of bonds issued by your chosen firm (8–10; if there are fewer than 10 issued, then all of the outstanding bonds). Based on the bonds’ current YTM, calculate the average current yield. a) The current yield cannot be determined from the information provided. b) The average current yield is 8.10%. c) The average current yield is 5.50%. d) The average current yield is 9.25%."

Answer 1

The average current yield of bonds is calculated by dividing the sum of the individual bonds' current yields by the number of bonds. The current yield is the annual interest payment divided by the current bond price. The Yield to Maturity considers both interest payments and capital gains or losses.

Step-by-step explanation:

The question pertains to calculating the average current yield of a set of bonds issued by a chosen firm. To determine the current yield for a single bond, you would divide the annual interest payment by the current bond price.

However, in this scenario, the student is provided with a Yield to Maturity (YTM), which factors in the total returns from interest payments and any capital gains (or losses) if the bond is bought at a discount (or premium) to the face value.

If you have the YTM of each bond, you would calculate the current yield for each, then add them up and divide by the number of bonds to find the average current yield.

For instance, using the information provided where an investor buys a $1,000 bond at $964 and receives $80 annually, the yield is calculated as (($1080 - $964)/$964) * 100, which equals 12%.

Interest rates play a key role in affecting the bond prices. They rise when market interest rates fall, and decrease when market interest rates rise.