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Difficulty: EasyGovernment, Municipal, and Corporate Bonds

An investor purchases a corporate bond with a par value of $1,000\$1,000 currently trading at a market price of $900\$900. If the bond has a stated annual coupon rate of 4.5%4.5\%, what is the bond's current yield (expressed as a percentage)?

Answer: 5 %

Answer

The current yield of the bond is 5.0%5.0\%.
The correct answer is 5.0%5.0\%. Current yield measures the annual return an investor receives based on the current market price of a bond. To calculate it, first determine annual coupon income: 4.5%4.5\% of the $1,000\$1,000 par value equals $45\$45. Next, divide this annual interest by the current market price of $900\$900: $45$900=0.05\frac{\$45}{\$900} = 0.05, which equals 5.0%5.0\%.

Step-by-Step Solution

1
Calculate the annual interest payment in dollars.
$1,000×0.045=$45\$1,000 \times 0.045 = \$45
Bond coupon rates are stated as an annual percentage of the $1,000\$1,000 par value.
2
Divide the annual dollar interest by the bond's current market price.
\frac{\$45}{\$900} = 0.05 \text{ or } 5.0\%
Current yield measures the annual income generated relative to the market price paid for the security.

Key Concept

Current Yield Calculation for Corporate Bonds
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Topics

Government, Municipal, and Corporate Bonds

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