Problem 7-26 Using Bond Quotes [LO2] Suppose the following bond quotes for IOU C
ID: 2613640 • Letter: P
Question
Problem 7-26 Using Bond Quotes [LO2]
Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2015.
What is the yield to maturity of the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
What is the current yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2015.
Explanation / Answer
Calculation of yield to maturity of the bond (YTM):
YTM = [C + {(F-P) /n}] / [(F+P)/2]
C= Coupon Payment = 2000 *6.4% =$128
F = Face Value = $2000
P = Price = 2000*102.96% = $2059.2
n = Years to maturity = April 19, 2015 to Apr 19, 2028 = 13 years
Hence ,
YTM = [128 + {(2000-2059.2) /13}] / [(2000+2059.2)/2]
= (128 – 4.5538) / 2029.60
= 0.0608
= 6.08%
Calculation of current yield:
Current Yield = Coupon Payment / Current Price
=128 /2059.20
= 0.0622
= 6.22%