Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesMedium
An investor holds a bond with a 6% coupon rate, currently trading at 105 ($1,050). The bond has a par value of $1,000. What is the bond's current yield?
- A5.71%
- B6.30%
- C6.67%
- D6.00%
Show answer & explanationAnswer & explanation
Correct answer: A. 5.71%
The annual interest payment is 6% of the par value ($1,000), which is $60. The current yield is calculated by dividing the annual interest payment by the bond's current market price. So, $60 / $1,050 = 0.05714 or 5.71%.
Why the other options are wrong
- B. This might be a miscalculation involving the current market price and coupon.
- C. This would be the current yield if the bond was trading at a discount (below par).
- D. This is the coupon rate, not the current yield, as the bond is trading at a premium.
Current Yield (Bonds)
A bond's annual income (coupon payment) divided by its current market price.
- Measures the return an investor receives relative to the current price.
- Differs from the coupon rate if the bond trades above or below par.
- Does not factor in capital gains/losses if held to maturity.
Memory trick: Coupon is 'Rate on Par', Current is 'Income on Price'.