current yield for annual payments
bonds have 25 years remaining to maturity. the bonds have a face value of $1000 and a yield to maturity of 7 percent. they pay interest annually and have a 11 percent coupon rate. what is their current yield?
The current yield for a bond is calculated by dividing the annual interest payment by the current market price of the bond.
In this case, the bond has a coupon rate of 11 percent, which means it pays $110 in interest annually (11 percent of the face value of $1000).
To find the current market price of the bond, we need to use the yield to maturity rate. Since the yield to maturity is 7 percent, we can use this information to calculate the approximate market price.
First, let's calculate the present value of the bond's future cash flows:
PV = (coupon payment) / (1 + ytm)^n + (face value) / (1 + ytm)^n
Where:
coupon payment = $110
ytm = yield to maturity rate = 7 percent
n = number of years remaining to maturity = 25
face value = $1000
Now, we can substitute these values into the equation:
PV = (110) / (1 + 0.07)^25 + (1000) / (1 + 0.07)^25
Calculating this equation, we find that the present value of the bond's cash flows is approximately $892.91.
Finally, we can calculate the current yield by dividing the annual interest payment by the market price:
Current Yield = (coupon payment) / (market price) = $110 / $892.91
By calculating this division, the current yield of the bond is approximately 12.32 percent.
To calculate the current yield for annual payments, you'll need the bond's annual coupon payment and its current market price.
First, let's find the annual coupon payment using the bond's face value and coupon rate. The coupon rate is given as 11 percent, so the annual coupon payment can be calculated as follows:
Annual Coupon Payment = Face Value * Coupon Rate
= $1000 * 11% ($0.11)
= $110
Next, we need to determine the current market price of the bond. Since the bond is selling at par (face value), the current market price is equal to the face value of $1000.
Now that we have both the annual coupon payment ($110) and the current market price ($1000), we can calculate the current yield using the following formula:
Current Yield = Annual Coupon Payment / Current Market Price
= $110 / $1000
= 0.11 or 11%
Therefore, the current yield for the given bond is 11%.