FINRA Series 7Investment Information and Suitable RecommendationsMedium
A customer purchases a corporate bond with a 5% coupon rate at a price of 90. What is the bond's current yield?
- A5.00%
- B5.56%
- C4.50%
- D6.25%
Show answer & explanationAnswer & explanation
Correct answer: B. 5.56%
Current yield = Annual interest / Market price. Annual interest = 5% × $1,000 = $50. Market price = 90% × $1,000 = $900. Current yield = $50 / $900 = 5.56%.
Why the other options are wrong
- A. Incorrect — this is the nominal (coupon) yield, not current yield at a discount price.
- C. Incorrect — this would be the coupon rate applied incorrectly, not current yield.
- D. Incorrect — this overstates the yield beyond the correct calculation.
Current Yield
A bond's annual coupon interest divided by its current market price, reflecting the actual income return based on what an investor pays today.
- Current yield = Annual interest / Market price
- Bonds bought at a discount have current yield > coupon rate
- Bonds bought at a premium have current yield < coupon rate
Memory trick: Discount bonds boost current yield above the coupon.