Question

De Costa Company’ bonds currently sell for $990. They have a 5-year maturity, an annual coupon rate of 8.25 percent, and a par value of $1,000. What is their current yield? 8.15% 8.59% 9.02% 8.98% 8.33%

Answer 1

Current Yield of YTM = Amount of Annual Coupon/Current Price of Bond

(It is different from Yield to Maturity)

This measure focues on the current price of the bond rather than the face value, which is the actual value invested by the investor if he purchases the bond at that price. Current yield represents the return an investor would expect if the owner purchased the bond and held it for a year

So, for this question,

Annual Coupon = Coupon % * Face Value = 8.25% * $1,000 = $82.5

Current yield = 82.5/990 = 8.33% --> Answer