Question

One year ago Banyan Industries issued a 12-year, 3% semi-annual coupon bond with a par value of $1,000. Currently, the bonds can be called in 2 years at a price of $1,030 and are selling for $974.82. What is the current yield on the bonds? a)1.54% b) 2.11% c)3.08% d)4.44% e)5.21%

Answer 1

The current yield on the Banyan Industries bond is calculated by dividing the annual coupon payment by the current bond price, which equates to 3.08%.

Step-by-step explanation:

The question asks us to calculate the current yield on the bonds issued by Banyan Industries. To find the current yield, we use the formula: Current Yield = Annual Coupon Payment / Current Bond Price. Since the bond is a semi-annual coupon bond with a coupon rate of 3%, the annual coupon payment is 3% of the par value of $1,000, which equals $30. However, because interest is paid twice a year, we actually receive $15 every six months, totaling $30 for the year. The bonds are currently selling for $974.82, so the current yield is $30 / $974.82 = 0.03078 or 3.08%.