Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesMedium
An investor owns a bond with a 4% coupon rate, currently trading at 90. The bond has a par value of $1,000. What is the current yield of this bond?
- A4.44%
- B4.50%
- C4.00%
- D5.00%
Show answer & explanationAnswer & explanation
Correct answer: A. 4.44%
Current yield is calculated by dividing the annual interest payment by the bond's current market price. The annual interest is 4% of $1,000 = $40. The current market price is 90% of $1,000 = $900. Therefore, the current yield is $40 / $900 = 0.0444 or 4.44%.
Why the other options are wrong
- B. This calculation is incorrect and does not reflect the formula for current yield.
- C. This is the coupon rate, not the current yield, as the bond is trading at a discount.
- D. This calculation is incorrect and does not reflect the formula for current yield.
Current Yield (Bonds)
The annual income (coupon payment) from a bond divided by its current market price.
- Measures the return an investor would receive if they purchased the bond today.
- Different from coupon rate if the bond trades at a premium or discount.
- Formula: Annual Interest Payment / Current Market Price.
Memory trick: Yields: What you get for what you pay.