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Difficulty: HardDebt Securities and Bond Structure

An investor purchases a corporate bond with a $1,000\$1,000 par value at a secondary market price quote of 92.5092.50. The bond pays semi-annual interest payments of $37.00\$37.00 every six months. What is the current yield of this bond, expressed as a percentage?

Answer: 8 %

Answer

The current yield of the bond is 8.00%.
The current yield of a bond reflects the annual interest income divided by the bond's current market price. Given semi-annual interest of $37.00\$37.00, the annual interest payment is $74.00\$74.00. A bond price quote of 92.5092.50 translates to a market price of $925.00\$925.00 (92.50%92.50\% of $1,000\$1,000 par value). Dividing $74.00\$74.00 by $925.00\$925.00 produces a current yield of 8.00%8.00\%.

Step-by-Step Solution

1
Calculate the annual interest income from the semi-annual payment
Annual Interest=$37.00×2=$74.00\text{Annual Interest} = \$37.00 \times 2 = \$74.00
Bonds typically pay interest semi-annually, so annual income is twice the semi-annual payment.
2
Convert the bond price quote into a dollar amount
Market Price=92.50%×$1,000=$925.00\text{Market Price} = 92.50\% \times \$1,000 = \$925.00
Corporate bonds are quoted as a percentage of their $1,000\$1,000 par value.
3
Compute the current yield
Current Yield=$74.00$925.00=0.08=8.00%\text{Current Yield} = \frac{\$74.00}{\$925.00} = 0.08 = 8.00\%
Current yield measures annual income as a percentage of current market price.

Key Concept

Bond Current Yield Formula
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Topics

Debt Securities and Bond Structure

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