Review sheet Exercise 2

Topics: Bond, Bonds, Fixed income analysis Pages: 3 (791 words) Published: September 26, 2013
﻿Current Yield:
This is not to be confused with Yield to Maturity. This item is the value of the interest payments (the coupon rate times the face value of the bond) divided by the current market price of the bond. For these purposes the payment frequency does not matter. We consider only the total amount paid in a given year. As a result we do not care about the time value of money when computing current yield (one reason why I am not a huge fan of this concept). Payment/Current Bond Price = Current Yield. We know that the payment does not change only the market price. As an example:

A bond has a current market price of 948.72, the face value of the bond is 1,000. The coupon rate for this bond is 5.8%. The bond makes semiannual payments. Solution: .058*1000 = 58  58/948.72 = 6.11%

Example 2:
A bond has a 6.9 percent coupon making semiannual payments. The bond was issued with a par value of \$1000 and is now trading in the market at 1030.45. What is the current yield? Solution: .069*1000 = 69  69/1030.45 = 6.70%

Occasionally, bonds when traded will be quoted as a percentage of Par. All this means as briefly shown in one example from class is the current market price is \$1000 times the quoted percentage of par. So if a bond is quoted at 88.74% (usually the percent sign is left off, but note that this is always referring to a percentage) par its current price is 1000*.8874 or \$887.40. This can be convenient when calculating Current Yield because now one can simply take the coupon rate of the bond and divide by the percentage of par and have obtained the Current Yield. Example:

A GE bond is quoted at 103.16 of par. The bond has a 5.6% coupon rate and makes quarterly payments. What is the current yield of the bond? Solution: 5.6/103.16 = 5.43%
One More Time Software has 6.4 percent coupon bonds on the market with 6 years to maturity. The bonds make semiannual payments and currently sell for 88.4 percent of par. What is the current...