Question

You purchase a $500 bond that pays 2% coupon yield ($10), and the bond is currently trading for $400. What is the current yield?

Answer 1

2.5%

Step by Step Explanation:

Face value = $500

Coupon yield = 2%

Income earned on he bond each year is at the rate of 2%.

Annual coupon = $10

Current bond price = $400

Formula for current yield =
`(Annual coupon amount)/(Current bond price)`

=
`(10)/(400)` ×100

= 2.5%

Hence, the current yield is 2.5%