Final answer:
The statement regarding bond yield is false; current yield on a bond is the interest income relative to its current market price, not just the annual interest payment. Bond yields can fluctuate and may differ from the bond’s coupon rate especially when bought or sold in secondary markets.
Step-by-step explanation:
The statement 'The current yield on a bond equals the annual interest payment it gives the holder' is False. The current yield on a bond actually refers to the interest or dividend income a bond produces, divided by the current market price of the bond, and not simply the annual interest payment. It is important to note that the bond yield, which is the rate of return on a bond, can be different from the interest rate printed on the bond, especially if the bond is bought or sold in the secondary market after its initial issuance.
For instance, if an investor buys a bond with a face value of $1,000 that pays annual interest of $80 (an 8% coupon rate), and the current market price of the bond is $964, the current yield would be $80 divided by $964, which results in approximately 8.3%. Thus, the yield includes the income from interest payments, and if there's a capital gain (or loss), that too affects the total return on the bond.
It is also key to understand that yields can fluctuate based on changes in interest rates in the broader market. When general interest rates rise, the price of existing bonds tends to fall, which can increase the current yield for new buyers. Conversely, when interest rates fall, existing bonds with higher coupon rates become more valuable, often selling for more than their face value, and the current yield for new buyers would be lower than the bond's coupon rate.