Question

What is the current yield for a Bond with a $1,000 par value bond, a 3% annual coupon rate that matures in 5 years, if the opportunity cost is 7%

Answer 1

$836

Step-by-step explanation:

market interest rate = 7%

in order to determine the current price of the bond we must add the present value of face value + coupon payments:

PV of face value = $1,000 / (1 + 7%)⁵ = $712.99

PV of coupon payments = $30 x 4.1002 (PV annuity factor, 7%, 5 periods) = $123.01

current market price = $712.99 + $123.01 = $836