Assume that a $1,000 bond issued in 2015 pays $100 in interest each year. What is the current yield on the bond if it can be purchased for $1,200? Enter your answer in percent form and to one decimal place. For example, if your answer is 0.034 (3.4%) then enter 3.4

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Business

Rowe

12 March, 06:29

Assume that a $1,000 bond issued in 2015 pays $100 in interest each year. What is the current yield on the bond if it can be purchased for $1,200? Enter your answer in percent form and to one decimal place. For example, if your answer is 0.034 (3.4%) then enter 3.4

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Answers (1)

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Miss Kitty · Answer 1

8.33%

Explanation:

Current yield of a bond is used to determine the annual rate of return of a bond that an investor holds. The formula for calculating it is as follows;

Current yield of a bond = annual coupon payment / current price

Annual coupon payment = interest payment = $100

Current price = $1,200

Next, plug in the numbers to the above formula;

Current yield = 100 / 1,200

= 0.0833

As a percentage, multiply 0.0833 by 100;

=0.0833 * 100

= 8.33%

Therefore, the current yield on the bond is 8.3% (to one decimal place.)