Multiple Choice
A typical municipal bond is selling at a price of \$5,114.20. What is the price quote for this bond (quoted as a percentage of par value, assuming a par value of \$5,000)?
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7. Receivables and Investments
Introduction to Investments in Securities
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What is the current yield of an 8.15\% coupon corporate bond quoted at a price of 94.30?
A
8.15\%
B
7.68\%
C
7.90\%
D
8.64\%
Verified step by step guidance1
Step 1: Understand the concept of current yield. Current yield is calculated as the annual coupon payment divided by the current market price of the bond. It represents the return an investor would expect if they purchased the bond at its current price.
Step 2: Identify the annual coupon payment. The coupon rate is given as 8.15%. To find the annual coupon payment, multiply the coupon rate by the bond's face value (typically \$100 unless otherwise stated). Use the formula:
Step 3: Determine the current market price of the bond. The bond is quoted at a price of 94.30, which means its current market price is 94.30% of its face value. Convert this percentage into a decimal by dividing by 100:
Step 4: Calculate the current yield using the formula: . Plug in the values for the annual coupon payment and the current market price obtained in the previous steps.
Step 5: Simplify the calculation to find the current yield. Ensure that the numerator (annual coupon payment) and denominator (current market price) are correctly substituted and divided to arrive at the current yield percentage.
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