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12 June, 12:13

Delta Corporation has a bond issue outstanding with an annual coupon rate of 7% and 20 years remaining until maturity. The par value of the bond is $1,000 and present market conditions justify an 11% required rate of return. What is the bond's current yield?

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  1. 12 June, 12:39
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    Current yield is 10.3%

    Explanation:

    Coupon payment = 1000 x 7% = $70 annually

    Number of periods = n = 20 years

    Yield to maturity = 11% annually

    Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula

    Price of the Bond = C x [ (1 - (1 + r) ^-n) / r ] + [ F / (1 + r) ^n ]

    Price of the Bond = $70 x [ (1 - (1 + 11%) ^-20) / 11% ] + [ $1,000 / (1 + 11%) ^20 ]

    Price of the Bond = $557.43 + $124.03 = $681.46

    Current yield is the ration of coupon payment to the price of the bond.

    Current Yield = Coupon Payment / Price of Bond = $70 / 681.46 = 0.1027 = 10.3%
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Home » Business » Delta Corporation has a bond issue outstanding with an annual coupon rate of 7% and 20 years remaining until maturity. The par value of the bond is $1,000 and present market conditions justify an 11% required rate of return.
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