FINRA Series 7Investment Information and Suitable RecommendationsEasy
An investor purchases a 5% corporate bond with a par value of $1,000, currently trading at $950. What is the current yield of this bond?
- A5.26%
- B5.50%
- C4.75%
- D5.00%
Show answer & explanationAnswer & explanation
Correct answer: A. 5.26%
The current yield is calculated by dividing the annual interest payment by the bond's current market price. The annual interest is 5% of $1,000 par value, which is $50. The current market price is $950. So, $50 / $950 = 0.05263 or 5.26%.
Why the other options are wrong
- B. Incorrect calculation.
- C. Incorrect calculation.
- D. This is the nominal yield (coupon rate), not the current yield based on market price.
Current Yield (Bonds)
Current yield measures the annual income an investor receives from a bond relative to its current market price, providing a more accurate reflection of return than the coupon rate if the bond is not trading at par.
- Formula: Annual Interest Payment / Current Market Price.
- Differs from nominal yield if bond trades above or below par.
- Does not factor in capital gains/losses if held to maturity.
Memory trick: Yields tell the story, Current is Cash over Price.