Assume that an investor pays $850 for a long-term bond that carries a 7.5 percent coupon. During the next 12 months, interest rates drop sharply, and the investor sells the bond at a price of $962.50.
a. Find the current yield that existed on this bond at the beginning of the year. What was it by the end of the one-year holding period?
b. Compute the return on this investment using the approximate yield formula and a one-year investment period.