Assume that a $1,000 bond issued in 2012 pays $100 in interest each year. What is the current yield on the bond if it can be purchased for
Instructions: Enter your responses as a percent rounded to one decimal place.
(a) $1,200? Yield on $1,200 bond is = ?%
(b) $1,000? Yield on $1,000 bond is = ?%
(c) $800? Yield on $800 bond is = ?%
To calculate the current yield on a bond, you need to divide the annual interest payment by the current market price of the bond, and then multiply by 100 to convert it to a percentage.
(a) For a $1,200 bond:
The annual interest payment is $100, and the market price is $1,200.
Current yield = (Annual Interest Payment / Market Price) x 100
Current yield = (100 / 1200) x 100
Current yield = 8.33%
(b) For a $1,000 bond:
The annual interest payment is still $100, and the market price is $1,000.
Current yield = (100 / 1000) x 100
Current yield = 10%
(c) For an $800 bond:
The annual interest payment remains $100, and the market price is $800.
Current yield = (100 / 800) x 100
Current yield = 12.5%
So, the current yields for the bond at the given market prices are:
(a) 8.3%
(b) 10%
(c) 12.5%