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Difficulty: EasyDebt Securities and Bond Structure

An investor purchases a corporate bond with a par value of $1,000\$1,000 and a stated annual coupon rate of 6%6\%. If the bond is currently trading in the secondary market at a price of $800\$800, what is the bond's current yield (expressed as a percentage)?

Answer: 7.5 %

Answer

The bond's current yield is 7.5%7.5\%.
The current yield of a bond measures the annual income return on the bond relative to its current market price. To calculate it, divide the annual coupon payment ($60\$60) by the market price ($800\$800), yielding 7.5%7.5\%.

Step-by-Step Solution

1
Determine the annual dollar coupon interest paid by the bond.
Annual Interest=$1,000×0.06=$60\text{Annual Interest} = \$1,000 \times 0.06 = \$60
The stated coupon rate is calculated as a percentage of the bond's par value ($1,000).
2
Divide annual interest by the current market price to find current yield.
Current Yield=$60$800=0.075=7.5%\text{Current Yield} = \frac{\$60}{\$800} = 0.075 = 7.5\%
Current yield measures the annual income yield generated relative to the market price paid for the bond.

Key Concept

Current Yield Calculation for Debt Securities
Estimated Time:45s
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Topics

Debt Securities and Bond Structure

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