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Multiple Choice
A bond's current yield is defined as:
A
Bond's face value divided by its current market price
B
Annual interest payment divided by the bond's face value
C
Current market price divided by the bond's annual interest payment
D
Annual interest payment divided by the bond's current market price
Verified step by step guidance
1
Step 1: Understand the concept of 'current yield' for a bond. Current yield is a measure of the annual return on a bond based on its current market price, not its face value.
Step 2: Identify the formula for calculating the current yield. The formula is: Current Yield = Annual Interest Payment / Current Market Price.
Step 3: Break down the components of the formula: The 'Annual Interest Payment' refers to the fixed interest (coupon payment) the bondholder receives annually, and the 'Current Market Price' is the price at which the bond is currently trading in the market.
Step 4: Apply the formula to calculate the current yield. Divide the Annual Interest Payment by the Current Market Price. Ensure that both values are expressed in the same currency and units.
Step 5: Interpret the result. The current yield provides insight into the bond's return relative to its market price, helping investors assess its attractiveness compared to other investment options.