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Difficulty: MediumDebt Securities and Bond Structure

A corporate bond with a par value of 1,000iscurrentlytradinginthesecondarymarketat1,000 is currently trading in the secondary market at 960. The bond pays a stated annual coupon rate of 6% in semi-annual installments. What is the current yield of this bond?

Answer: 6.25 %

Answer

The current yield of the bond is 6.25%.
The current yield formula compares the annual dollar interest earned to the bond's current market price. The bond pays 6% of its 1,000parvalueannually,whichequals1,000 par value annually, which equals 60 per year. Dividing 60bythecurrentmarketpriceof60 by the current market price of 960 yields 0.0625, or 6.25%.

Step-by-Step Solution

1
Determine the annual coupon payment in dollars
60annualincome(60 annual income ( 30 semi-annually)
The stated coupon rate (nominal yield) is always applied to the $1,000 par value regardless of the market price.
2
Calculate the current yield percentage
6.25%
Current yield measures the annual income generated relative to the current secondary market purchase price (60/60 / 960).

Key Concept

Current Yield Calculation for Debt Securities
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Topics

Debt Securities and Bond Structure

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