FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client owns a XYZ 6% corporate bond with a par value of $1,000, currently trading at $950. What is the current yield of this bond?
- A6.32%
- B6.00%
- C6.50%
- D5.70%
Show answer & explanationAnswer & explanation
Correct answer: A. 6.32%
Current yield measures the annual income an investor receives from a bond relative to its current market price. It is calculated by dividing the annual interest payment by the bond's current market price.
Why the other options are wrong
- B. This is the coupon rate, not the current yield, as the bond is trading at a discount.
- C. This is an incorrect calculation and overestimates the current yield.
- D. This is an incorrect calculation, possibly multiplying the coupon rate by the market price.
Current Yield (Bonds)
Current yield is a bond's annual interest payment divided by its current market price. It represents the return an investor would expect if they purchased the bond today and held it for one year.
- Formula: Annual Interest Payment / Current Market Price.
- Does not consider the bond's maturity or capital gains/losses if held to maturity.
- Different from coupon rate (based on par value) and Yield to Maturity (YTM).
Memory trick: Current yield focuses on the 'now'—annual interest over current price.