Suppose the current interest rate is 12 percent and a bond with a face value of $500 that
pays a coupon rate of 15 percent is selling for $450. Calculate the yield on this bond.
How do I calculate the yield on this bond?
To calculate the yield on a bond, you can use the following formula:
Yield = (Coupon payment / Current price) + ((Face value - Current price) / Current price)
In this case, the coupon payment can be calculated as the coupon rate multiplied by the face value:
Coupon payment = Coupon rate * Face value
Using the given information, the coupon payment would be:
Coupon payment = 0.15 * $500 = $75
Now, let's plug in the values into the yield formula:
Yield = ($75 / $450) + (($500 - $450) / $450)
Simplifying further:
Yield = 0.1667 + 0.1111
Yield = 0.2778 or 27.78%
Therefore, the yield on this bond is 27.78%.