Converse Judson Industries has 9-year, $1,000 face value bonds outstanding that pay a 7 percent semiannual coupon. If your nominal annual required rate of return is 10 percent with semiannual compounding, what is the current yield on the bonds?
A) 8.49%
B) 8.59%
C) 8.71%
D) 8.84%
E) 8.90%

Question

Quizplus · Accepted Answer

The correct answer is A because the current yield is the annual coupon payment divided by the current market price of the bond. The annual coupon payment is $70 ($1,000 face value x 7% coupon rate). The current market price of the bond can be found using the bond pricing formula:Bond Price = (C / r) x [1 - (1 + r)^-n] + (FV / (1 + r)^n)where:C = annual coupon paymentr = semiannual required rate of return (5% = 10% / 2)n = number of semiannual periods (18 = 9 years x 2)FV = face value of the bond ($1,000)Plugging in the values, we get:Bond Price = ($70 / 0.05) x [1 - (1 + 0.05)^-18] + ($1,000 / (1 + 0.05)^18)Bond Price = $1,349.93Therefore, the current yield is:Current Yield = (Annual Coupon Payment / Current Market Price) x 2Current Yield = ($70 / $1,349.93) x 2Current Yield = 8.49%

Converse Judson Industries Has 9-Year, $1,000 Face Value Bonds Outstanding