A bond has a 1000 par value, 10 years to maturity a 7 percentannual coupon, and sells for $985.
a) What is its current yield?
b) What is its yield to maturity (YTM)?
c) Assume that the yield to maturity remains constant for the next3 years. What will the price be 3 years from today?
 

Answer:

a)

Annual coupon = 7% of 1000 = 70

Current yield = (Annual coupon / price) * 100

Current yield = (70 / 985) * 100

Current yield = 7.11%

b)

Yield to maturity = 7.22%

Keys to use in a financial calculator:

FV 1000

PV -985

PMT 70

N 10

CPT I/Y

c)

Number of periods = 10 - 3 = 7

Price = Coupon * [1 - 1 / (1 + r)^n] / r + FV / (1 + r)^n

Price = 70 * [1 - 1 / (1 + 0.0722)^7] / 0.0722 + 1000 / (1 + 0.0722)^7

Price = 70 * [1 - 0.61386] / 0.0722 + 613.860063

Price = 70 * 5.348199 + 613.860063

Price = $988.23