SIE practice questioneasyCurrent Yield
A bond has a par value of $1,000, a coupon rate of 6%, and is currently trading at $900. What is its current yield?
- A9.00%
- B5.40%
- C6.00%
- D6.67%✓ Correct answer
Explanation
Why D — 6.67%
Current yield = Annual coupon payment / Current market price. The annual coupon is 6% of $1,000 = $60. Current yield = $60 / $900 = 6.67%. Note that current yield differs from the coupon rate (6%), which is based on par value. When a bond trades at a discount (below par), its current yield is higher than the coupon rate. When trading at a premium (above par), current yield is lower than the coupon rate.
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