The current yield measures the income generated by a fixed-income security, such as a bond, relative to its current market price. It is calculated by dividing the annual interest payment by the bond's current market price.
What is the formula for calculating the current yield of a bond?
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A) The annual interest payment divided by the face value gives the coupon rate. B) The current yield is calculated by dividing the annual interest payment by the bond's current market price. C) Dividing the coupon rate by the current market price does not provide a meaningful measure of yield. D) The coupon rate divided by the face value is not a measure of yield.
Which of the following factors does NOT affect the current yield of a bond?
A) The coupon rate determines the annual interest payment, which is used to calculate the current yield. B) The current market price is the denominator in the current yield calculation. C) The maturity date does not directly affect the current yield, as it does not impact the annual interest payment or the current market price. D) The face value is used to determine the annual interest payment, which is used to calculate the current yield.
An investor compares two bonds with the same face value and maturity date. Bond A has a higher coupon rate than Bond B but trades at a higher market price. Which bond has a higher current yield?
A) A higher coupon rate does not necessarily mean a higher current yield if the market price is also higher. B) A lower coupon rate does not necessarily mean a lower current yield if the market price is also lower. C) Both bonds are not guaranteed to have the same current yield. D) The current yield depends on both the coupon rate and the market price, so more information is needed to determine which bond has a higher current yield.
In the early 1980s, interest rates were at historically high levels, with the Federal Reserve raising rates to combat inflation. As a result, bond yields were also very high, with some long-term government bonds offering current yields of 15% or more. This made bonds an attractive investment option for income-seeking investors, as the high yields provided a significant income stream relative to the bonds' market prices.
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Example Series 65 Example Practice Question
Suppose an investor is considering purchasing a bond with a face value of $1,000, a coupon rate of 5%, and a current market price of $950. The annual interest payment on the bond would be $50 (5% of $1,000). The current yield on the bond would be 5.26% ($50 / $950), which represents the income generated by the bond relative to its current market price.
Current Yield = (Annual Interest Payment / Bond's Market Price) * 100
Suppose a bond has an annual interest payment of $50 and is trading at $1,000. To calculate the current yield: Current Yield = ($50 / $1,000) * 100 Current Yield = 0.05 * 100 Current Yield = 5%