A bond with a par value of $1,000 has annual interest payment of $75

Finance Mar 08, 2021

A bond with a par value of $1,000 has annual interest payment of $75. The bond currently sells for $937.5 and has 7 years to maturity. Which of the following is true?

A) The yield-to-maturity must be 8.5%.

B) The current yield on the bond must be 8%.

C) The investor's required rate of return must be 7.5%.

D) The coupon rate must be 8.5%.

Expert Solution

Computation of the current yield:-

Current yield = Annual coupon payment / Current selling price

= $75 / $937.5

= 8.00%

Hence, the correct option is B) The current yield on the bond must be 8%.

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