Question

Current yield = annual coupon payment/price.
a) True
b) False

Answer 1

The statement "Current yield = annual coupon payment/price" is a) True. (option a)

Step-by-step explanation:

The statement is true. Current yield is calculated by dividing the annual coupon payment by the current market price of the bond. Mathematically, it is expressed as:

`\[ \text{Current Yield} = \frac{\text{Annual Coupon Payment}}{\text{Price}} \]`

This formula provides a measure of the return an investor can expect to receive from a bond based on its current market price. It is important to note that the current yield is just one of several metrics used to evaluate the attractiveness of a bond investment.

For example, if a bond has an annual coupon payment of $50 and its current market price is $1,000, the current yield would be:

`\[ \text{Current Yield} = (\$50)/(\$1,000) = 5\% \]`

This means that the investor can expect a 5% return on their investment in the form of annual interest payments relative to the current market price of the bond. Investors often use current yield alongside other metrics, such as yield to maturity and coupon rate, to make informed decisions about bond investments.(option a)