Final answer:
The current yield of a bond with an annual coupon rate of 6%, selling for $885, and with a face value of $1000 is approximately 6.78%. This calculation is relevant to college-level finance and involves the concepts of coupon rate and bond pricing.
Step-by-step explanation:
The subject of the question is the calculation of a bond's current yield, which is a concept in finance. The grade level of the question is college, as it involves concepts typically covered in finance or investment courses at the post-secondary level.
To calculate the current yield of a bond, you need to know the annual coupon payments and the price at which the bond is currently selling. The current yield is found by dividing the annual coupon payments by the current price of the bond. In the given scenario, an 8-year bond with a $1000 face value is selling for $885 and has an annual coupon rate of 6%, meaning it pays $60 in interest annually ($1000 * 6%). Therefore, the current yield of the bond is calculated as ($60 / $885) * 100%, which gives us approximately 6.78%.
It is essential to distinguish between the current yield and the yield to maturity or total return, which considers both the interest payments and any capital gains or losses if the bond is held to maturity. The example provided in the reference incorrectly states an 8% coupon rate, so it is not directly applicable to the student's question; however, it helps exemplify the concept of yield and what happens when market interest rates change.