FINRA Series 7Investment Information and Suitable RecommendationsEasy
A client purchases a 7% corporate bond with a par value of $1,000, currently trading at $950. What is the bond's current yield?
- A7.00%
- B7.37%
- C7.89%
- D7.50%
Show answer & explanationAnswer & explanation
Correct answer: B. 7.37%
Current yield is calculated by dividing the annual interest payment by the bond's current market price. In this case, $70 / $950 = 0.07368 or 7.37%.
Why the other options are wrong
- A. This is the nominal yield (coupon rate), not the current yield.
- C. This calculation is incorrect and does not represent a standard yield measure.
- D. This calculation is incorrect and does not represent a standard yield measure.
Current Yield
The annual income (interest or dividends) generated by an investment, divided by its current market price.
- Measures the return based on the bond's current price, not its par value.
- For bonds, it is the annual coupon payment divided by the current market price.
- Differs from nominal yield (coupon rate) and yield to maturity.
Memory trick: Current Price, Current Payout, Current Return.