Question

Assuming that the annual bond discount rate (or market rate) is 6.4% for all maturities and a face value of a bond of $1,000. The current yield of the bond with a coupon rate of 8.6%, paying semi-annual coupons, with 8 years to maturity is_____?

Answer 1

The current yield of the bond is approximately 8.93%.

Step-by-step explanation:

The current yield of a bond is the annual interest payment divided by the bond's current market price. In this case, the bond has a face value of $1,000 and a coupon rate of 8.6%, paying semi-annual coupons. To calculate the current yield, we need to find the market price of the bond. Assuming a discount rate of 6.4% for all maturities, we can use the present value formula to find the present value of the bond's future cash flows. Using this formula, we find that the market price of the bond is $964. The annual interest payment for the bond is $86 (8.6% of $1,000), so the current yield is ($86/$964) * 100, which is approximately 8.93%.