A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a coupon rate of 10%, and has a yield to maturity of 12%. The current yield on this bond is

The answer is 10.65 percent

Explanation:

We first find the curren price of the bond

N(Number of periods) = 4 years

I/Y(Yield to maturity) = 12 percent

PV(present value or market price) = ?

PMT( coupon payment) = $100 (10 percent x $1,000)

FV( Future value or par value) = $1,000.

We are using a Financial calculator for this.

N= 4; I/Y = 12; PMT = 100; FV= $1,000; CPT PV= -939.25

The market price of the bond is $939.25

Therefore, the current yield on this bond is 100/939.25

= 0.1065

Expressed as a percentage

10.65 percent

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