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%

Explanation:

For someone who pays $400 for the bond that gives $10 in returns, their yield is ...

... $10/$400 × 100% = 2.5%

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Comment on the problem

It is unclear what yield is to be calculated, since the problem statement seems to be about a bond you own. Your yield remains 2% as long as you own the bond. If you sell the bond for $400, likely you will experience a loss (unless you've held the bond more than 10 years). The yield calculated above is that for a similar bond someone purchases for $400 that pays the specified dividends.