Question

A coupon bond that pays interest of $56 annually has a par value of $1,000, matures in 5 years, and is selling today at a $74.25 discount from par value. The current yield on this bond is _________.

Answer 1

The current yield on this bond is 6.06%.

Step-by-step explanation:

The current yield on the bond can be calculated using the formula:

Current Yield = Annual Interest Payment / Bond Price

In this case, the annual interest payment is $56 and the bond is selling at a $74.25 discount from its par value of $1,000. Therefore, the bond price is $925.75. Plugging in these values, we get:

Current Yield = $56 / $925.75 = 0.0606 (or 6.06%)

So, the current yield on this bond is 6.06%.

Answer 2

The current yield on this bond is 110 %.

Step-by-step explanation:

The following data can be extracted from the question :

pmt = $56

p/yr = 1

Fv = $1,000

n = 5

Pv = - $74.25

r = ?

The current yield on this bond r, can be calculated using a financial calculator.

Enter the data and obtain r as 109.8984%

Thus the current yield of this bond is 110 %