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Difficulty: EasyDebt Securities and Bond Structure

An investor purchases a corporate bond with a par value of 1,000atamarketpriceof1,000 at a market price of 900. The bond carries a stated annual coupon rate of 5.4%5.4\%. What is the current yield of this bond expressed as a percentage?

Answer: 6 %

Answer

The current yield of the bond is 6.0%.
Current yield reflects the return based on the market price paid rather than par value. Calculating $54$900\frac{\$54}{\$900} gives 0.060.06, or 6.0%.

Step-by-Step Solution

1
Calculate the annual coupon interest payment
$54
Annual coupon interest equals coupon rate (5.4%) multiplied by par value ($1,000).
2
Divide annual interest payment by the current market price
0.06
Current yield measures annual income relative to purchase price (54/54 / 900).
3
Convert decimal to percentage
6.0%
Multiplying 0.06 by 100 converts the decimal yield to a percentage format.

Key Concept

Current Yield Calculation
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Topics

Debt Securities and Bond Structure

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