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Assume you purchased a corporate bond at its current market price of $835 on January 1, 2017
Assume you purchased a corporate bond at its current market price of $835 on January 1, 2017. It pays 12.00 percent interest and will mature on December 31, 2026, at which time the corporation will pay you the face value of $1,000.
a. Determine the current yield on your bond investment at the time of purchase. (Do not round intermediate calculations and round your final answer to 1 decimal place. Omit the "%" sign in your response.)
Current yield %
b. Determine the yield to maturity on your bond investment at time of purchase. (Do not round intermediate calculations and round your final answer to 1 decimal place. Omit the "%" sign in your response.)
Yield to maturity %
Expert Solution
Given,
Face Value = $1,000
Market Price = $835
Interest = 12%
Annual Coupon = 1000* 12%
= 120
Years to Maturity = 10
So,
1.) Computation of current yield;
Current Yield =Annual Coupon / Market Price
= (120/ 835)
= 0.143713 or 14.37%
2.)
Computation of yield to maturity;
Yield To maturity =((Coupon payment +(Face Value -Price)/years to maturity)) / (face Value + Price)/ 2
= ((120+ (1000- 835) / 10) / (1000+ 835)/ 2
= 136.5/ 917.5
= 0.148774 or 14.88%
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