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Chapter 4: Q. 7 (page 133)

When is the current yield a good approximation of the yield to maturity?

Short Answer

Expert verified

It is close to maturity near about 10 years.

Step by step solution

01

Step 1. Introduction

Current yield is an investment's annual income (hobby or dividends) divided through the contemporary fee of the security. This degree examines the contemporary fee of a bond, as opposed to searching at its face value.

02

Step 2. Explanation

When the bond price is very close to par or the maturity is over 10 years, the present yield will be a good approximation of the yield to maturity. This is because the present discounted values of cash flows further in the future are so little that the value of a long-term coupon bond is near to that of a perpetual with the same coupon rate.

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Most popular questions from this chapter

Why would a government choose to issue a perpetuity, which requires payments forever, instead of a terminal loan, such as a fixed-payment loan, discount bond, or coupon bond?

A lottery claims its grand prize is \(15 million, payable over five years at \)3,000,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 7%.

A \(1,100-face-value bond has a 5% coupon rate, its current price is \)1,040, and it is expected to increase to $1070 next year. Calculate the current yield, the expected rate of capital gains, and the expected rate of return

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What is the yield to maturity on a simple loan for \(1,500 that requires a repayment of \)15,000 in five years?
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