Examkin

Question

Difficulty: EasyGovernment, Municipal, and Corporate Bonds

A corporate bond with a par value of 1,000paysa61,000 pays a 6% annual coupon rate ( 60 in interest per year). If the bond is currently trading in the secondary market at a discounted price of $800, what is the current yield of the bond expressed as a percentage?

Answer: 7.5 %

Answer

The current yield of the corporate bond is 7.5%.
Current yield reflects the return an investor receives based on the current market price of the bond. It is calculated as Annual Interest divided by Current Market Price. Here, annual interest is 60(60 ( 1,000 par \times 6%). Dividing 60bythemarketpriceof60 by the market price of 800 equals 0.075, or 7.5%.

Step-by-Step Solution

1
Calculate the annual interest payment from the coupon rate and par value.
Annual Interest = 6% of 1,000=1,000 = 60
Coupon interest is always calculated based on the bond's $1,000 par value.
2
Divide annual interest by the current market price.
60/60 / 800 = 0.075
Current yield measures annual interest income relative to current market purchase price rather than par value.
3
Convert the decimal to a percentage.
0.075 * 100 = 7.5%
Yields are conventionally expressed as annual percentages.

Key Concept

Calculating current yield on a debt security
Estimated Time:1m 0s
Rate this question

Topics

Government, Municipal, and Corporate Bonds

More questions from this topic