Multiple Choice
Which of the following best describes the current yield of a bond?
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
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A $1,000 bond trading at 102½ means that:
A
The bond is selling for $1,050.
B
The bond is selling for $1,002.50.
C
The bond is selling for $1,020.50.
D
The bond is selling for $1,025.
Verified step by step guidance1
Step 1: Understand the concept of bond pricing. Bonds are often quoted as a percentage of their face value. For example, a bond trading at 102½ means it is trading at 102.5% of its face value.
Step 2: Identify the face value of the bond. In this case, the bond has a face value of $1,000.
Step 3: Convert the quoted percentage (102½) into a decimal form. 102½ is equivalent to 102.5%, which can be expressed as 1.025 in decimal form.
Step 4: Multiply the face value of the bond ($1,000) by the decimal form of the quoted percentage (1.025). This calculation will give the selling price of the bond.
Step 5: Verify the result by ensuring the calculation aligns with the quoted percentage and the face value of the bond.
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