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Difficulty: EasyGovernment, Municipal, and Corporate Bonds

A corporate bond with a par value of $1,000\$1,000 pays an annual coupon rate of 6%6\%. If the bond is currently trading in the secondary market at $800\$800, what is its current yield expressed as a percentage?

Answer: 7.5 %

Answer

The current yield of the bond is 7.5%7.5\%.
Current yield is calculated by taking the bond's annual dollar interest payment and dividing it by its current market price. For this bond, the annual interest is $60\$60 (6%6\% of $1,000\$1,000 par value). Dividing $60\$60 by the current market price of $800\$800 results in 0.0750.075, or 7.5%7.5\%.

Step-by-Step Solution

1
Calculate the annual coupon payment in dollars
$1,000×0.06=$60\$1,000 \times 0.06 = \$60
The coupon rate is always applied to the par value of $1,000\$1,000 to determine the annual interest payment.
2
Divide the annual coupon payment by the current market price
$60$800=0.075\frac{\$60}{\$800} = 0.075
Current yield measures the annual income generated relative to the current purchasing price of the bond.
3
Convert the resulting decimal value into a percentage
0.075×100=7.5%0.075 \times 100 = 7.5\%
Yield figures are expressed as annual percentages.

Key Concept

Current Yield of a Bond
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Topics

Government, Municipal, and Corporate Bonds

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