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 = ?%
80%
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
( a ) $1,200?
( b ) $1,000?
( c ) $800?
To calculate the current yield on a bond, you need to divide the annual interest payment by the current price of the bond and then multiply by 100 to express the answer as a percentage.
(a) If the bond can be purchased for $1,200:
- Annual interest payment = $100
- Current price of the bond = $1,200
- Current yield = (Annual interest payment / Current price of the bond) * 100
- Current yield = ($100 / $1,200) * 100, which equals approximately 8.3%. Therefore, the yield on a $1,200 bond is 8.3%.
(b) If the bond can be purchased for $1,000:
- Annual interest payment = $100
- Current price of the bond = $1,000
- Current yield = (Annual interest payment / Current price of the bond) * 100
- Current yield = ($100 / $1,000) * 100, which equals 10%. Therefore, the yield on a $1,000 bond is 10%.
(c) If the bond can be purchased for $800:
- Annual interest payment = $100
- Current price of the bond = $800
- Current yield = (Annual interest payment / Current price of the bond) * 100
- Current yield = ($100 / $800) * 100, which equals 12.5%. Therefore, the yield on an $800 bond is 12.5%.
Note: The current yield represents the annual interest payment as a percentage of the current market price of the bond. It is a measure of the return an investor will receive from the bond's interest payments relative to the amount invested.