Question

Buck buys a 7.5% corporate bond with a current yield of 4.8%. How much did he pay for the bond?

Answer 1

Given :

Coupon interest rate = 7.5%

Current yield = 4.8%

To find :

Amount pay for the bond = ?

Solution :

As we know that

Current Yield = Annual Coupon Interest ÷ Current Market Price

Now putting the values to the above formula  

0.048 = 0.075 × ($1,000) ÷ Current Market Price

Current Market Price = $1,562.5

We assume the par value is $1,000

In order to calculate the amount i.e to pay for the bond we simply divided the annual coupon interest by the current yield so that the amount pay or current market price could arrive

Hence, the current market price is $1,562.50

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