National Distributors has $1,000 face value bonds outstanding with a market price of $1,013. The bonds pay interest semiannually, mature in 11 years, and have a yield to maturity of 6.87 percent. What is the current yield

Current Yield is 6.94%

Explanation:

Current yield is the ratio of coupon payment of a bond to its current market price.

First we need to calculate the coupon payment by using following formula

YTM = [ C + ( F - P ) / n ] / [ ( F + P ) / 2 ]

6.87% = [ C + ( $1,000 - $1,013 ) / 11 ] / [ ( $1,000 + $1,013 ) / 2 ]

6.87% = [ C + ( $1,000 - $1,013 ) / 11 ] / [ ( $1,000 + $1,013 ) / 2 ]

6.87% = [ C - $1.18 ] / 1006.5

1,006.5 x 6.87% = C - $1.18

69.15 = C - 1.18

C = 69.15 + 1.18 = $70.3 annually

Current Yield = Annual Coupon payment / Current market price

Current Yield = $70.3 / $1,013 = 0.0694 = 6.94%

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