Oil Wells offers 5.6 percent coupon bonds with annual payments and a yield to maturity of...
Oil Wells offers 5.6 percent coupon bonds with annual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. The face value is $1,000. What is the current yield?
Homework Answers
Annual coupon=1000*5.6%=56
Hence current price=Annual coupon*Present value of annuity factor(6.94%,7)+$1000*Present value of discounting factor(6.94%,7)
=56*5.40058109+1000*0.625199672
=$927.63(Approx)
Hence current yield=Annual coupon/Current price
=56/927.63
=6.04%(Approx).
NOTE:
1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=56[1-(1.0694)^-7]/0.0694
=56*5.40058109
2.Present value of discounting factor=1000/1.0694^7
=1000*0.625199672
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