Question

Sarah Allen wants to invest in four-year bonds that are currently priced at $855.51. These bonds have a coupon rate of 6.7 percent and make semiannual coupon payments. What is the current market yield on this bond? (Round intermediate calculations to 5 decimal places, e.g. 1.25145 and final answer to 2 decimal places, e.g. 15.25%.)'

Answer 1

The current market yield on this bond is 15.66%.

Step-by-step explanation:

To calculate the current market yield on a bond, we need to use the formula:

Market Yield = (Annual Coupon Payment / Bond Price) x 100

In this case, the bond has a $1,000 face value and a coupon rate of 6.7%. Since the bond makes semiannual coupon payments, the annual coupon payment can be calculated as 2 x $1,000 x 0.067 = $134. The bond is currently priced at $855.51. Substituting these values into the formula gives:

Market Yield = ($134 / $855.51) x 100 = 15.66%