Securities Industry Essentials (SIE) ExamKnowledge of Capital MarketsMedium
An investor holds a municipal bond with a par value of $1,000, a coupon rate of 4.00%, and a maturity of 10 years. If the bond is currently trading at $950, what is its current yield?
- A4.00%
- B3.80%
- C4.44%
- D4.21%
Show answer & explanationAnswer & explanation
Correct answer: D. 4.21%
To calculate the current yield, first determine the annual interest payment: $1,000 (par value) * 4.00% (coupon rate) = $40. Then, divide the annual interest payment by the current market price: $40 / $950 = 0.042105, or 4.21%.
Why the other options are wrong
- A. This is the coupon rate, not the current yield, as the bond is trading at a discount.
- B. This would be the yield if the bond traded at a premium.
- C. This calculation is incorrect for current yield.
Current Yield
Current yield measures the annual income (coupon payment) from a bond relative to its current market price. It is calculated as Annual Interest Payment / Current Market Price.
- Measures income return on current price.
- Calculated as Annual Interest / Current Price.
- Differs from coupon rate when bond trades at premium or discount.
- Does not factor in capital gains/losses to maturity.
Memory trick: Current Yield: Income 'now' on 'today's' price.