Securities Industry Essentials (SIE) ExamUnderstanding Trading, Customer Accounts, and Prohibited ActivitiesMedium
An investor owns a bond with a par value of $1,000, a coupon rate of 6%, and is currently trading at 105. What is the current yield of this bond?
- A6.50%
- B6.30%
- C6.00%
- D5.71%
Show answer & explanationAnswer & explanation
Correct answer: D. 5.71%
Current yield is calculated by dividing the annual interest payment by the bond's current market price. The annual interest payment is 6% of the $1,000 par value, which is $60. The current market price is 105% of par, or $1,050. So, $60 / $1,050 = 0.05714 or 5.71%.
Why the other options are wrong
- A. This is an incorrect calculation.
- B. This might be the result of dividing the coupon rate by a discount price.
- C. This is the coupon rate, not the current yield, as the bond is trading at a premium.
Current Yield (Bonds)
Current yield measures the annual income (coupon payment) an investor receives relative to the bond's current market price. It's a key metric for evaluating a bond's profitability.
- Formula: Annual Interest Payment / Current Market Price.
- Differs from coupon rate if the bond trades at a premium or discount.
- If bond trades at a premium (above par), current yield < coupon rate.
- If bond trades at a discount (below par), current yield > coupon rate.
Memory trick: Current Yield: Income over today's price!