A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has a:

Question

Quizplus · Accepted Answer

The current yield can be calculated as the annual coupon payment divided by the market price of the bond:
Current yield = $60 / $965.00 = 0.0622 or 6.22%

The coupon rate can be calculated as the annual coupon payment divided by the face value of the bond:
Coupon rate = $60 / $1,000 = 0.06 or 6.00%

Since the current yield is higher than the coupon rate, this means the bond was purchased at a discount. The correct answer is B because the current yield is equal to 6.22%, but the coupon rate is only 6.00%. This means the bond is currently offering a higher yield than its stated coupon rate, which is typical for a bond purchased at a discount.

A $1,000 Face Value Bond Purchased for $965