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Difficulty: MediumDebt Securities and Bond Structure

An investor purchases a 10-year corporate bond with a 1,000parvaluetradinginthesecondarymarketatapriceof1,000 par value trading in the secondary market at a price of 920. If the bond pays a semi-annual interest payment of $23.00, what is the bond's current yield?

Answer: 5 %

Answer

5.0%
Current yield calculates the return an investor receives based on the current market price of a bond (46.00annualinterest/46.00 annual interest / 920.00 market price = 5.0%).

Step-by-Step Solution

1
Calculate total annual interest income
23.00×2=23.00 × 2 = 46.00
Bonds pay interest semi-annually, so the six-month payment must be annualized to determine total annual income.
2
Calculate current yield
(46.00/46.00 / 920.00) × 100 = 5.0%
Current yield measures annual income as a percentage of the bond's secondary market purchase price.

Key Concept

Current Yield Calculation for Debt Securities
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Topics

Debt Securities and Bond Structure

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