An investor purchases a corporate bond with a par value of 1,000 and a 6% annual coupon ra… — FINRA SIE (Securities Industry Essentials)

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

Answer: 7.5 %

Answer

7.5%

Current yield is calculated by taking the bond's annual dollar interest payment and dividing it by its current market price. With a 6% coupon rate on a

1,000 par value, the annual interest payment is

60. Dividing

60 by the market price of

800 gives a current yield of 7.5%.

Step-by-Step Solution

Calculate the annual dollar interest paid by the bond.

$60 annual interest

Multiply the $1,000 par value by the 6% coupon rate.

Divide the annual dollar interest by the bond's current market price.

60 /

800 = 0.075

Current yield measures the annual income generated relative to the current purchasing cost.

Convert the decimal to a percentage.

7.5%

Yields are standardly stated in percentage terms.

Key Concept

Bond Current Yield

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