Chapter 20.II, Problem 23RE

### Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447

Chapter
Section

### Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447
Textbook Problem

# Calculate the annual interest and current yield of the following bonds. Company Coupon Rate Annual Interest Market Price Current Yield 23. Blockbuster 7.50 125.25

To determine

To calculate: The annual interest and current yield of a Blockbuster bond with a coupon rate of 7.50% currently selling at market price of 125.25.

Explanation

Given Information:

A Blockbuster bond with a coupon rate of 7.50% and the currently selling at market price is 125.25.

Formula used:

Steps to calculate the current yield of a bond:

Step 1: Calculate the annual interest and current price of the bond with the formula,

Annualâ€‰interest=Parâ€‰valueÃ—Couponâ€‰rate

Step 2: Divide the annual interest of the bond by current market price as,

Currentâ€‰yield=Annualâ€‰interestCurrentâ€‰marketâ€‰price

Step 3: Convert the final answer to percent, rounded to nearest tenth.

Calculation:

A Blockbuster bond with a coupon rate of 7.50%, which can be denoted in decimal as,

7.50100=0.075

The annual interest can be calculated as,

Annualâ€‰interest=Parâ€‰valueÃ—Couponâ€‰rate=1,000Ã—0.075=75

Thus, annual interest is 75.

The current market price can be calculated as a percent of the par value of \$1,000,

Priceâ€‰percent=125

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