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

An investor purchases a corporate bond with a par value of $1,000 and a stated annual coupon rate of 7.0% for a secondary market price of$ 875. What is the current yield of this bond expressed as a percentage?

Answer: 8 %

Answer

The current yield of the bond is 8.0%.

Current yield measures the annual income returned on a bond relative to its current market price. First, calculate the annual coupon payment:

1,000 par value × 7.0% coupon rate =

70 annual interest. Next, divide the annual interest by the secondary market purchase price:

70 /

875 = 0.08, or 8.0%.

Step-by-Step Solution

Calculate annual dollar interest payment

$70.00

Annual Interest = Par Value × Coupon Rate =

1,000 × 7.0% =

70.00.

Calculate current yield percentage

8.0%

Current Yield = Annual Interest / Secondary Market Price =

70.00 /

875.00 = 0.08 (8.0%).

Key Concept

Current Yield Calculation for Debt Securities

Estimated Time:45s

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