A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a purchase price of $980 has a:

Question

Quizplus · Accepted Answer

To calculate the current yield of the bond, we divide the annual coupon payment by the purchase price:

Current Yield = Annual Coupon Payment / Purchase Price
Current Yield = $40 / $980
Current Yield = 0.0408 or 4.08%

To calculate the yield to maturity of the bond, we need to take into account the capital gain or loss from purchasing the bond at a discount. In this case, the bond is purchased for $980 but will pay the full face value of $1,000 at maturity, resulting in a capital gain of $20.

Using the bond pricing formula and solving for the yield to maturity, we get:

$980 = $40 / (1 + Y) + $1,000 / (1 + Y)^2
YTM = 0.0612 or 6.12%

Therefore, the correct answer is C, as it states that the bond has a current yield of 4.08% and a yield to maturity of 6.12%.

A $1,000 Face Value Bond, with an Annual Coupon of $40