The State of Adaven issued $50 million of perpetual bonds in 1990. The bonds were issued in $100 denominations with an annual coupon interest rate of 5%. Determine the rate of return or current yield on these bonds if they are purchased at the current price of $40.

Question

Quizplus · Accepted Answer

The current yield or rate of return on a bond is calculated by dividing the annual coupon payment by the current price of the bond. Here, the annual coupon payment per $100 bond is 5% of $100 = $5. If the bond is purchased at $40, the current yield = ($5 / $40) * 100% = 12.5%.

The State of Adaven Issued $50 Million of Perpetual Bonds