Bond Yields.
An AT&T bond has 10 years until maturity, a coupon rate of 8 percent, and sells for $1,100.
a. What is the current yield on the bond?
b. What is the yield to maturity?
To calculate the current yield on the bond, you need to divide the annual coupon payment by the current market price of the bond.
a. Current Yield:
Step 1: Calculate the annual coupon payment
The coupon rate is given as 8 percent. So, the annual coupon payment can be calculated as (Coupon Rate * Face Value) / 100.
Annual Coupon Payment = (8% * Face Value) / 100
Step 2: Calculate the current yield
Current Yield = (Annual Coupon Payment / Market Price) * 100
To calculate the yield to maturity, you can use a financial calculator or an Excel spreadsheet.
b. Yield to Maturity:
The yield to maturity is the total return anticipated on a bond if held until it matures. It considers both the annual coupon payments and the capital gain or loss if the bond is held until maturity. The yield to maturity takes into account the current market price, face value, time until maturity, and the coupon rate.
To calculate the yield to maturity, you can use the following formula:
Yield to Maturity = [(Annual Coupon Payment + (Face Value - Market Price) / Years to Maturity) / (Face Value + Market Price) / 2] * 100
You can substitute the values given in the question to calculate the yield to maturity.