A $1,000 face value bond, with one year to maturity that sells for $950 and has a $40 annual coupon has a:

Question

Quizplus · Accepted Answer

To calculate current yield, we divide the annual coupon payment by the current market price of the bond: $40/$950 = 0.0421 or 4.21%. Therefore, the current yield is 4.21%.
To calculate yield to maturity, we need to solve for the discount rate that will make the present value of the bond's future cash flows equal to its current market price. Since the bond sells at a discount, the yield to maturity will be greater than the current yield. Therefore, choice A is incorrect.
Since the yield to maturity is greater than the current yield, choice B is also incorrect.
The coupon rate is 4% ($40/$1000). Since the current yield is greater than the coupon rate, choice C is incorrect.

A $1,000 Face Value Bond, with One Year to Maturity