Bonds

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Bonds

Postby swarnendupathak » Thu Oct 18, 2012 2:39 pm

Hi, Please help me to solve this problem, I did'nt get the solution that is mentioned.

Consider a $1,000 par value bond with a 7% annual coupon. The bond pays interest annually. There are 2 years remaining until maturity. What is the current yield on the bond assuming that the required return on the bond is 10%? Use simple compounding.
Choose one answer.
a. 0.1
b. 0.0738
c. 0.05
d. 0.0352
The correct answer is 0.0738

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pankaj
Finance Junkie
Posts: 61
Joined: Fri Aug 03, 2012 11:24 am

Re: Bonds

Postby pankaj » Thu Oct 18, 2012 5:14 pm

The question is very simple, to calculate current yield, first you need to know the present value of the bond. The present value of the bond is equal to the present value of the remaining payments on the bond.

Using financial calculator you can calculate the bond value.
N= 2, PMT= 70 (coupon= 1000*7%), I/Y= 10%, FV= 1000 (Face value), compute PV= ?
This will give the present value of 947.93.

Than to calculate current yield, divide coupon by the present value of the bond.

Current Yield = 70/947.93 = 0.07384 (7.384%)

Hope this helps! :)

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: Bonds

Postby swarnendupathak » Fri Oct 19, 2012 9:23 am

Thanks Pankaj, just confused with the required rate of return with yeild.
Thanks.

Swarnendu


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