Question

Oak Bay Software has 9.5% coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 107.1% of par. What is the current yield on these bonds?

a) 8.86%
b) 9.50%
c) 10.00%

Answer 1

The current yield of Oak Bay Software's bonds is approximately 8.87%, calculated by dividing the annual interest payment of $95 by the current market price of $1,071. This value is closest to option (a) 8.86%.

Step-by-step explanation:

The current yield on Oak Bay Software's bonds can be calculated based on the annual interest payment and the current market price. Since the bonds have a 9.5% coupon rate, they pay $95 in interest per year ($1,000 par value × 9.5%). The bonds currently sell for 107.1% of par, which is $1,071 ($1,000 × 107.1%).

To find the current yield, we divide the annual interest payment by the current market price:

Current Yield = Annual Interest Payment / Current Market Price
Current Yield = $95 / $1,071
Current Yield = 0.0887 or 8.87%

Therefore, the current yield is approximately 8.87%, which is closest to option (a) 8.86%.