American Hat has $1,000 face value bonds outstanding with a market price of $1,150. The bonds pay interest semiannually, mature in 8 years, and have a yield to maturity of 5.98 percent. What is the current yield?

7.28%

Explanation:

Using Time Value for Money TVM we calculate payment for the period:

PMT = {FV - PV * (1 + r) ^n] / {[ (1 + r) ^ n] - 1 } / r

PV = - 1150

FV = 1000

N = 8 * 2 = 16

I = 5.98/2 = 2.99%

842.54 / 20.14

PMT = 41.83

To calculate current yield:

PMT * 2 / PV

41.83 * 2 / 1150

= 7.28 %