What is the current yield on a $1,000 par value 5% bond selling at $800?

What is the current yield on a $1,000 par value 5% bond selling at $800?

• A. 5.00%
• B. 5.60%
• C. 6.25%
• D. 8.50%

Answer: (C)

To calculate the current yield on a bond, you divide the bond's annual coupon payment by its current market price. In this case, the bond has a par value of $1,000 and offers an annual coupon rate of 5%. This means the bond pays $50 annually (5% of $1,000). Since the bond is currently selling for $800, the formula for the current yield is: Current Yield = (Annual Coupon Payment / Current Market Price) x 100% Plugging in the numbers: Current Yield = ($50 / $800) x 100% = 0.0625 x 100% = 6.25% Thus, the correct answer reflects the current yield of 6.25%, demonstrating that as bonds are sold at a discount to par value, the current yield increases above the coupon rate, as seen here. This concept is essential because it highlights how a bond’s market price influences its yield, providing insight for investors when evaluating potential returns.

To calculate the current yield on a bond, you divide the bond's annual coupon payment by its current market price. In this case, the bond has a par value of $1,000 and offers an annual coupon rate of 5%. This means the bond pays $50 annually (5% of $1,000).

Since the bond is currently selling for $800, the formula for the current yield is:

Current Yield = (Annual Coupon Payment / Current Market Price) x 100%

Plugging in the numbers:

Current Yield = ($50 / $800) x 100% = 0.0625 x 100% = 6.25%

Thus, the correct answer reflects the current yield of 6.25%, demonstrating that as bonds are sold at a discount to par value, the current yield increases above the coupon rate, as seen here. This concept is essential because it highlights how a bond’s market price influences its yield, providing insight for investors when evaluating potential returns.