An individual pays $4,000 for a $5,000 face value, coupon-bearing bond that pays $400 per year and will be held until it matures in ten years. The current yield on this bond is
A) 10 percent.
B) 8 percent.
C) 6 percent.
D) 5 percent.

Question

Quizplus · Accepted Answer

The current yield is calculated as the annual coupon payment divided by the purchase price of the bond. Here, the annual coupon payment is $400, and the purchase price is $4,000. Thus, the current yield is $400 / $4,000 = 0.10 or 10 percent.

An Individual Pays $4,000 for a $5,000 Face Value, Coupon-Bearing