Questions: Question 6 1 pts Suppose that today, the current yield for a corporate bond is 6.5%. If the market price will go down by 20% tomorrow, compute the current yield after the decrease. Round your answer to the nearest tenth of a percent.

Solution Steps

To solve this problem, we need to understand that the current yield of a bond is calculated as the annual interest payment divided by the current market price of the bond. If the market price decreases by 20%, the new market price will be 80% of the original price. We can then use this new price to calculate the new current yield.

1. Calculate the new market price after a 20% decrease.
2. Use the new market price to calculate the new current yield.
3. Round the result to the nearest tenth of a percent.

The current market price of the bond decreases by \(20\%\). Therefore, the new market price as a percentage of the original price is:

\[ \text{New Price Percentage} = 100\% - 20\% = 80\% \]

The current yield is defined as the annual interest payment divided by the market price. The original current yield is \(6.5\%\). The new current yield can be calculated using the formula:

\[ \text{New Current Yield} = \frac{\text{Current Yield}}{\text{New Price Percentage}} \times 100\% \]

Substituting the values:

\[ \text{New Current Yield} = \frac{6.5}{80} \times 100 = 8.125\% \]

Rounding \(8.125\%\) to the nearest tenth of a percent gives:

\[ \text{New Current Yield (Rounded)} = 8.1\% \]

Final Answer