Question

A bond with a face value of $5,000 has 10 years until maturity, a coupon rate of 3%, and sells for $5,500. What is the current yield on the bond, and what is the yield to maturity? A. 2.73% Current Yield and 2.48% Yield to Maturity B. 2.95% Current Yield and 2.48% Yield to Maturity C. 3.27% Current Yield and 1.30% Yield to Maturity D. 3.27% Current Yield and 1.50% Yield to Maturity E. None of the above

Answer 1

The correct answer is E. None of the above

Note:

Current Yield = Coupon / Bond Price *100

= (Face Value * Coupon rate ) /Bond Price *100

= ( $ 5,000* 3%) / $ 5,500*100

= 2.73%

The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100

= [$ 150+ ( $ 5,000- $ 5500) /10] /[( $ 5,000+ $ 5500)/2] *100

= 100/5250*100

= 1.90%

Note : Coupon = Rate * Face Value

= 3% * $ 5,000

= $ 150

Since this formula gives an approximate value, the financial calculators can be used alternatively.

where,

Par Value = $ 5,000

Market Price = $ 5500

Annual rate = 3% and

Maturity in Years = 10 Years

Hence the yield to maturity = 1.89%