The current yield on a bond is a good approximation of the bond's yield to maturity when the bond matures in five years or less and its price differs from its par value by a large amount.

Question

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The current yield, which is calculated by dividing the bond's annual interest payments by its current market price, does not account for the bond's price approaching par value at maturity or the reinvestment of interest payments, making it a less accurate approximation of the bond's yield to maturity, especially when the bond's price differs significantly from its par value.

The Current Yield on a Bond Is a Good Approximation