CFA Level IFixed IncomeEasy
A bond has a 5% annual coupon rate and a face value of $1,000. It is currently trading at a market price of $950. The bond's current yield is closest to:
- A5.56%
- B5.26%
- C5.00%
- D4.76%
Show answer & explanationAnswer & explanation
Correct answer: B. 5.26%
Current yield = Annual coupon payment / Current market price = $50 / $950 = 5.263%, closest to 5.26%.
Why the other options are wrong
- A. This overstates the yield; recompute $50/$950 carefully.
- C. This is the coupon rate, not the current yield, which differs since the bond trades below par.
- D. This would result from dividing price by coupon rather than coupon by price.
Current Yield
A bond's annual coupon payment divided by its current market price, ignoring capital gains/losses and time value of money.
- Current yield rises above coupon rate when bond trades at a discount
- Ignores reinvestment and price appreciation to maturity
- Simplest yield measure, least comprehensive
Memory trick: Current yield: coupon over price, nothing nice.