Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesMedium
An investor owns a bond with a 5% coupon rate, currently trading at 95. The bond has a par value of $1,000. What is the bond's current yield?
- A5.00%
- B5.26%
- C5.50%
- D5.75%
Show answer & explanationAnswer & explanation
Correct answer: B. 5.26%
Current Yield = Annual Interest Payment / Current Market Price. The annual interest payment is 5% of the $1,000 par value, which is $50. The current market price is 95% of par, or $950. So, Current Yield = $50 / $950 = 0.05263 or 5.26%.
Why the other options are wrong
- A. This is the nominal yield (coupon rate), not the current yield.
- C. Incorrect calculation; does not properly account for the discount.
- D. Incorrect calculation.
Current Yield (Bonds)
The annual interest payment of a bond divided by its current market price. It represents the return an investor would expect if they purchased the bond today and held it for one year.
- Formula: Annual Interest / Current Market Price.
- Changes with bond's market price.
- Higher than nominal yield when bond trades at a discount; lower when at a premium.
Memory trick: Yields: Nominal is fixed, Current flexes with price, YTM considers maturity.