Compute the current yield yield of an 8 10year bond that is

Compute the current yield yield of an 8%, 10-year bond that is currently priced in the market at $1,100. Use annual compounding to find the promised yield on this bond. Repeat the promised yield calculation, but this time use semiannual compounding to find yield to maturity.

Solution

current yield = 80/1100 = 7.27%

N = 10, FV = 1000, PV = -1100, PMT = 80

use rate function in Excel

yield to maturity = 6.60%

N = 20, FV = 1000, PV = -1100, PMT = 40

semi annual yield = 3.3085%

annual yield = (1 + 3.3085%)^2 - 1 = 6.73%