Answer to Question #177619 in Financial Math for Raida

Question

Buy a U.S. T-bond for $1,100 that makes annual coupon payments at a rate of 10% until the bond matures 10 years from now, at which time it will pay you $1,000

Answer 1

trading price=11000

face value=1000

rate=10

time =10 years

annual interest=$interest\times face value$

$=\frac{10}{100}\times1000$

$=100$

current yield$=\frac{annual interest}{trading price}$

$=\frac{100}{1000}=0.09091$

$=0.09091\times 100$

$=9.091$ %

$yield to maturity=\frac{annual interest payment+(face value/years to maturity)}{face value +current price/2)}$

$=\frac{100-(100/2)}{2100/2}$

$=\frac{90}{1050}$

$=0.08571$

$=0.08571\times 100$

$=8.571$ %