Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2015.

Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2015.

Company (Ticker)

Coupon

Maturity

Last Price

Last Yield

EST Vol (000s)

IOU (IOU)

7.4

Apr 19, 2028

103.46

??

1,833

What is the yield to maturity of the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

YTM

%

What is the current yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Current yield

%

 

Explanation:

The bond has 13 years to maturity, so the bond price equation is:

P = $2,069.20 = $74(PVIFAR%,26) + $2,000(PVIFR%,26)

Using a spreadsheet, financial calculator, or trial and error we find:

R = 3.495%

This is the semiannual interest rate, so the YTM is:

YTM = 2 × 3.495% = 6.99%

The current yield is the annual coupon payment divided by the bond price, so:

Current yield = $148 / $2,069.20

Current yield = .0715, or 7.15%

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter

26

±$2,069.20

$148 / 2

$2,000

N

I/Y

PV

PMT

FV

Solve for

3.495%

3.495% × 2 = 6.99%