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Difficulty: HardDebt Securities and Bond Structure

A corporate bond is currently trading in the secondary market at a quoted price of 105.00105.00 (% of par). If the bond's current yield is calculated at 6.00%6.00\%, what is the annual dollar coupon payment for a single $1,000\$1,000 par value bond?

Answer: 63 $

Answer

The annual dollar coupon payment per $1,000\$1,000 par bond is $63.00\$63.00.
Current yield is defined as the annual dollar interest divided by the current market price of the bond. To find the annual dollar interest, multiply the current yield (6.00%6.00\%) by the bond's current market price ($1,050.00\$1,050.00, which is 105.00%105.00\% of the $1,000\$1,000 par value). Doing so gives 0.0600×$1,050.00=$63.000.0600 \times \$1,050.00 = \$63.00.

Step-by-Step Solution

1
Calculate the market dollar price of the bond from its percentage-of-par quote.
Market Price = $1,000×1.05=$1,050.00\$1,000 \times 1.05 = \$1,050.00
Bond price quotes are expressed as a percentage of par value (105.00%=105.00105.00\% = 105.00).
2
Rearrange the Current Yield equation to solve for annual coupon payment.
\text{Annual Coupon Payment} = \text{Current Yield} \times \text{Market Price}
Current yield relates annual coupon income directly to current market value rather than par value.
3
Multiply the current yield by the dollar market price.
0.0600×$1,050.00=$63.000.0600 \times \$1,050.00 = \$63.00
This yields the total annual interest payment in dollars.

Key Concept

Calculating annual coupon payment using Current Yield and secondary market price
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Topics

Debt Securities and Bond Structure

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