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Difficulty: EasyDebt Securities and Bond Structure

An investor purchases a corporate bond with a par value of 1,0001,000 dollars and a stated annual coupon rate of 8%8\%. If the bond is currently trading in the secondary market at a price of 800800 dollars, what is the current yield of the bond expressed as a percentage?

Answer: 10 %

Answer

The current yield of the bond is 10%.
Current yield reflects the return an investor receives relative to the bond's current market price. The formula is Current Yield=Annual Interest PaymentCurrent Market Price\text{Current Yield} = \frac{\text{Annual Interest Payment}}{\text{Current Market Price}}. Given an 8%8\% coupon rate on a 1,0001,000 dollar par value bond, annual interest is 8080 dollars. Dividing 8080 dollars by the market price of 800800 dollars yields 0.100.10, or 10%10\%.

Step-by-Step Solution

1
Calculate annual interest payment in dollars
80 dollars
The annual interest is based on the stated coupon rate applied to the par value (1,000×8%=801,000 \times 8\% = 80).
2
Calculate the current yield
10%
Current yield is calculated by dividing annual interest income by the current market price (80800=0.10\frac{80}{800} = 0.10 or 10%10\%).

Key Concept

Current yield formula and calculation
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Topics

Debt Securities and Bond Structure

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