National Distributors has $1,000 face value bonds outstanding with a market price of $1,013.The bonds pay interest semiannually,mature in 11 years,and have a yield to maturity of 6.87 percent.What is the current yield?

Question

Quizplus · Accepted Answer

Current yield is calculated as annual interest payment divided by the current market price of the bond. Since the bonds pay interest semiannually, the annual interest payment would be:
= (Coupon rate * Face value)/2
= (Coupon rate * $1,000)/2
= $20 * Coupon rate

The yield to maturity is 6.87%, which means the annual interest payment would be:
= $20 * 0.0687
= $1.374

The market price of the bond is $1,013. Therefore, the current yield would be:
= ($1.374/$1,013) * 100%
= 0.0136 * 100%
= 1.36%

Rounding the answer to two decimal places, we get 6.95%. Thus, the best choice is (B).

National Distributors Has $1,000 Face Value Bonds Outstanding with a Market