Question

A company has a semiannual coupon bond issue that has a coupon rate of 8%, a current price of $1,250. Determine the bond’s current yield.

Group of answer choices

8%

6.4%

3.2%

Cannot be determined without knowing it YTM.

Answer 1

The correct answer is 6.4%
Current Yield = (Annual Cupon amount / Bond Price) * 100

Assuming the Face Value of bond is $1000

Where Cupon Amount = Face value of bond * Cupon Rate
= $1000 * 8%
= $80

Bond Price = $1,250

Therefore Current Yield

= (80 / 1250) * 100

= 6.4%

Note - Semiannual frequency means the bond will make cupon payments twice in a year.
= $1000 * 8% * 1/2

= $40

Thus $40 payment will be made in each half. This means an annual cupon payment of $80