A 5.5 percent coupon municipal bond has 16 years left to maturity and has a price quote of 92.55. The bond can be called in nine years. The call premium is one year of coupon payments. Compute the bond's current yield. Assume interest payments are paid semiannually and a par value of $5,000.

Question

Quizplus · Accepted Answer

The current yield of a bond is calculated by dividing the annual interest payment by the bond's current price. The annual interest payment for a 5.5 percent coupon bond with a par value of $5,000 is $275 (5.5% of $5,000). The bond's price quote of 92.55 means the bond is selling for 92.55% of its par value, so the price is $4,627.50 (92.55% of $5,000). The current yield is therefore $275 / $4,627.50 = 0.0594, or 5.94 percent.

A 55 Percent Coupon Municipal Bond Has 16 Years Left to to Maturity