Company A has a bond outstanding that pays a 6% coupon.The interest is paid annually,and the bond matures in 10 years.The market rate of interest on bonds of similar risk is 5% and the bond is selling for $1,077.32.One year from today,the bond is expected to be selling for $1,071.08.What is the current yield on the bond?

Question

Quizplus · Accepted Answer

To calculate the current yield, we need to divide the annual coupon payment by the current market price of the bond:

Annual Coupon Payment = Face Value × Coupon Rate
                     = $1,000 × 0.06
                     = $60

Current Market Price = $1,077.32

Current Yield = Annual Coupon Payment / Current Market Price
             = $60 / $1,077.32
             ≈ 0.055694
             = 5.5694%

Therefore, the best choice is B.

Company a Has a Bond Outstanding That Pays a 6