Question

Doug purchases a $10,000 5-year bond with a coupon rate of 5%. He pays $9,700 for this bond. What is Doug's current yield?

Answer 1

Doug's current yield on the bond is calculated by dividing the annual coupon payment by the price he paid for the bond and multiplying by 100%. It amounts to 5.15%.

Step-by-step explanation:

Doug's current yield on the bond can be calculated by dividing the annual coupon payment by the price he paid for the bond. The bond has a coupon rate of 5%, which means it pays $500 annually (5% of $10,000). Since Doug paid $9,700 for the bond, the current yield is calculated as follows:

Current Yield = (Annual Coupon Payment / Purchase Price) * 100%

Current Yield = ($500 / $9,700) * 100% = 5.15%

Therefore, Doug's current yield on the bond is 5.15%%.