A bond with par value of $1,000 has an annual coupon rate of 4.8% and currently sells for $970. What is the bond’s current yield?

Question:

A bond with par value of $1,000 has an annual coupon rate of 4.8% and currently sells for $970. What is the bond’s current yield?

Assuming a maturity period of 10 years (Note the tutor added this)

Yield to Maturity =5.18%  

Explanation:

The Yield to maturity is the discount rate that equates then price of the bonds to the present of cash inflows expected from the bond  

The yield on the bond can be determined as follows using the formula below:  

YTM = C + F-P/n) ÷ 1/2 (F+P)  

YTM-Yield to maturity-  

C- annual coupon  

F- Face Value  

P- Current Price  

n- years to maturity

YTM-?, C- 4.8%× 1000 =60, Face Value - 1,000, P-970, n- 10

YTM = (48 + (1000-970)/10) ÷ ( 1/2× (1000 + 970) )  

YTM = 0.0518  × 100 = 5.18%

Yield to Maturity =5.18%  

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