Question

Current yield and Capital Gains yield: 8. A corporate bond is selling at a price of 1031.6 and carries a 6.50 percent coupon. The bond pays interest semiannually and the par value is $1,000. What is the current yield on one of these bonds?

Answer 1

The current yield of a corporate bond with a 6.50 percent coupon rate and selling for $1,031.6 is 6.30 percent. This is calculated using the annual interest payment of $65 divided by the bond's current market price.

Step-by-step explanation:

The current yield on a bond is a measure of the annual income generated by the bond relative to its current market price. In this case, we want to calculate the current yield of a corporate bond that has a coupon rate of 6.50 percent and is selling for $1,031.6. Since the par value of the bond is $1,000 and it pays a semiannual coupon, the bond will pay $65 in interest per year (6.50% of $1,000).

The formula for current yield is:

Current Yield = (Annual Interest Payment / Current Market Price) × 100

Using this formula:

Current Yield = ($65 / $1,031.6) × 100 = 6.30%

Therefore, the current yield of the bond is 6.30% percent.