Gray House is issuing bonds paying $105 annually that will mature fifteen years from today. The bond

Par value of Bond = $1,000
Annual payments or interest = $105
Current selling price = $980
No. of years = 15 years

(a) coupon rate = (105 x 100)/1000
   = 10.5% p.a.

(b) Current yield = Coupon amount /Current price of bonds
   = 105/980
   = 0.1071 or 10.71%

(c) Yield to maturity = C + (M - P)/n (M+P)/2
   = 105 + (1000 - 980)/15 (1000+980)/2
   = 0.1074 or 10.74%

The differences between three methods lie in the time to determine the bond value. While the coupon rate exhibits the yield in relative to the par value set by the issuer on the issue date, the current yield mentions the yield of a bond at the present moment and the yield to maturity is the yield of the bond at the maturity date. Another difference is the coupon rate does not change or CHANGE.

Each of the three methods has its own strengths and weaknesses. More specifically, coupon rate can be used to determine the level of risk. The higher the coupon rate, the higher the potential risk. However, the disadvantage is that this method can be used to compare value bonds only if the bonds are in the same industry, have the same issuing time, and have the same mature period of time. Speaking of the current yield, this method provides us with a look at the current price of bond and forecast the return may expect if he or she holds the bond for a one-year period. However, this method may fail to reflect exactly how much an investor can receive because bond and stock prices are constantly changing due to market factors.

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Gray House is issuing bonds paying $105 annually that will mature fifteen years from today. The bond

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