An investor is evaluating a corporate bond with a par value of 1,000 that is currently tra… — FINRA SIE (Securities Industry Essentials)

An investor is evaluating a corporate bond with a par value of $1,000 that is currently trading in the secondary market at$ 925.00. The bond pays a stated annual coupon rate of 5.55%, with interest payments made semi-annually. What is the current yield of this bond?

Answer: 6 %

Answer

The current yield of the bond is 6.00%.

The current yield measures a bond's annual interest income relative to its current market price. To find the current yield, calculate the annual coupon payment in dollars (

1,000 par × 5.55% =

55.50) and divide by the secondary market price (

925.00).

55.50 divided by $925.00 equals 0.06, or 6.00%.

Step-by-Step Solution

Calculate the annual dollar coupon payment

1,000 \times 0.0555 =

55.50

Current yield requires using the full annual dollar interest income paid by the bond.

Divide annual dollar interest by the current market price

\frac{

55.50}{

925.00} = 0.06

Current yield measures the annual income generated relative to the current secondary market price.

Convert the decimal yield into a percentage rate

0.06 \times 100 = 6.00\%

Yield measurements on bond securities are standardly stated in percentage terms.

Key Concept

Current Yield Calculation for Debt Securities

Estimated Time:1m 30s

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