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 $6.0\%$ . If the bond is currently trading at a secondary market price of $800$ , what is the bond's current yield expressed as a percentage?

Answer: 7.5 %

Answer

The bond's current yield is 7.5%.

Current yield measures the annual return an investor receives based on the bond's current market price. It is calculated as Annual Interest Payment divided by Current Market Price. For a

1,000 par bond with a 6.0% coupon, the annual interest is

60 (

1,000 x 0.06). Dividing

60 by the market price of $800 yields 0.075, or 7.5%.

Step-by-Step Solution

Calculate the annual interest payment

$60

Annual interest is calculated by multiplying the par value ($1,000) by the nominal coupon rate (6.0%).

Calculate current yield

7.5%

Current yield equals annual interest income divided by current market price (

60 /

800 = 0.075 or 7.5%).

Key Concept

Current Yield Calculation

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