FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client is considering purchasing a municipal bond with a 4.5% coupon rate, currently trading at 98. The bond has 10 years to maturity and is callable in 5 years at 102. What is the bond's Current Yield?
- A4.39%
- B4.59%
- C4.82%
- D4.73%
Show answer & explanationAnswer & explanation
Correct answer: B. 4.59%
Current Yield is calculated by dividing the annual interest payment by the bond's current market price. Annual interest is 4.5% of $1,000 par value, which is $45. The current market price is 98% of $1,000, or $980. So, $45 / $980 = 0.045918 or 4.59%.
Why the other options are wrong
- A. This would be incorrect if the market price was higher than 98.
- C. This would result if the bond was trading at a steeper discount.
- D. This might be a miscalculation involving yield to maturity or call.
Current Yield
The annual income generated by a bond (coupon rate x par value) divided by its current market price.
- Measures the return an investor receives relative to the current market price.
- Does not consider the bond's maturity or potential capital gains/losses.
- Differs from coupon rate (based on par) and yield to maturity (considers all cash flows).
Memory trick: Current Yield: Income over Investment.