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Calculate the current yield and yield to maturity

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Reference no: EM132478441

1. General Electric bonds have a par value of $1,000, sell for $1,070, mature in 6 years, and have a 7% coupon rate paid annually.

a. Calculate the current yield and yield to maturity for this bond.

Current Yield = annual coupon payment / current price = $70 / $1070 = 6.54% $1070 = + => YTM = 5.595%

b. Calculate the realized compound yield for an investor with a 4-year horizon and a reinvestment rate of 5% over the period. At the end of the 4 years, assume that the coupon bonds will sell at a YTM of 6%.(You need financial calculator or Excel to calculate yield to maturity)

Using a financial calculator,

P0 = $1,070

P4 = + = 1018.33

reinvested coupons = $70 () = $301.71

P0 = P4 + reinvested coupons = $1018.33 + $301.71 = $1320.04 realized annual compound yield = 5.39%

Reference no: EM132478441

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