Question

The current yield on a $6,000 face value, 10 percent coupon bond selling for $5,000 is

	A.	15%
	B.	10%
	C.	5%
	D.	12%

Answer 1

There is an inverse relationship between price of bonds and the Yield of bonds. Hence with the increase in the bond price, the yield of the bond decreases.

Hence in the bond market, we expect to see an increase in the price of bonds and a decrease in the yield of bonds.

Current Yield= (annual coupon payment/ current market price)*100

Face value=6000

Selling price=$5,000

Coupon rate=10%

Annual coupon payment=10% of Face value

=0.10*6,000

=$600

Current Yield= (annual coupon payment/ current market price)*100

=(600/5000)*100

=12%

Hence option D is the correct answer.