FINRA Series 7Investment Information and Suitable RecommendationsMedium
An investor owns a XYZ 5% corporate bond with a par value of $1,000, currently trading at 90. The bond has 10 years to maturity and is callable in 5 years at 102. What is the bond's current yield?
- A4.44%
- B5.56%
- C5.78%
- D5.00%
Show answer & explanationAnswer & explanation
Correct answer: B. 5.56%
Current yield is calculated by dividing the annual interest payment by the bond's current market price. The coupon rate and par value determine the annual interest, and the market price is given as 90% of par.
Why the other options are wrong
- A. This would be the yield to maturity if the bond were purchased at a premium.
- C. This is incorrect. It would imply a lower market price or higher coupon.
- D. This is the coupon rate, not the current yield.
Current Yield
A bond's current yield measures the annual income (coupon payment) relative to its current market price.
- Calculated as Annual Interest / Current Market Price.
- Does not account for capital gains or losses if held to maturity.
- Higher than coupon rate when bond trades at a discount; lower when at a premium.
Memory trick: Current yield is like asking 'how much cash am I getting back each year for what I paid TODAY?'