Delta Corporation has a bond issue outstanding with an annual coupon rate of 7% and 20 years remaining until maturity. The par value of the bond is $1,000 and present market conditions justify an 11% required rate of return. What is the bond's current yield?

Current yield is 10.3%

Explanation:

Coupon payment = 1000 x 7% = $70 annually

Number of periods = n = 20 years

Yield to maturity = 11% annually

Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula

Price of the Bond = C x [ (1 - (1 + r) ^-n) / r ] + [ F / (1 + r) ^n ]

Price of the Bond = $70 x [ (1 - (1 + 11%) ^-20) / 11% ] + [ $1,000 / (1 + 11%) ^20 ]

Price of the Bond = $557.43 + $124.03 = $681.46

Current yield is the ration of coupon payment to the price of the bond.

Current Yield = Coupon Payment / Price of Bond = $70 / 681.46 = 0.1027 = 10.3%