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Workman Software has 6.4 percent coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 94.31 percent of par. a. What is the current yield on the bonds?

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Answer:

Coupon (R) = 6.4% x $1,000 = $64

Semi-annual coupon = R/2 = $64/2 = $32

Current market price (Po) = 94.31% x $1,000 = $943.10                                              

Current yield = R

                         Po

                      = $32

                         $943.10

                      =  0.0339 = 3.39%                                                                                                                                                                                                          

Explanation:

The current yield on the bond is a function of coupon divided by the current market price. The coupon will be divided by 2 since the coupon is paid semi-annually.

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