The Pioneer Petroleum Corporation has a bond outstanding with an $85 annual interest
payment, a market price of $800, and a maturity date in five years. Find the following:
a. The coupon rate.
b. The current rate. (current yield)
c. The approximate yield to maturity
a. $85 interest/$1,000 par = 8.5% coupon rate
b. $85 interest/$800 market price = 10.625% current yield
c. Approximate yield to maturity = (Y')
Principal payment Price of the bond
Annual interest payment
Number of years to maturity
(Y' )
.6 (Price of the bond) .4 (Principal payment)
$1,000 $800
$85
5
.6 ($800) .4 ($1,000)
$200
$85
5
$480 $400
$85 $40 $125
14.20%
$880 $880