SIE Exam Question 60: Answer and Explanation

Question: 60

What is the current yield of a 5 percent bond that is priced at 80?

• A. 5.00 percent
• B. 6.25 percent
• C. 4.00 percent
• D. 8.00 percent

Correct Answer: B

Explanation:

Bonds by default have a par value (also face value or nominal value) of $1,000, but bonds might trade for more or less, in which case they would be priced or quoted at some percentage of that. In this case, a bond that is priced at 80 would sell for $800. The percent tied to a bond is its coupon, and it is stated in terms of the par value. In this case, a bond with a 5% coupon, which can be called a 5 percent bond, would issue regular coupon payments of 5% of its par value, or $50.

Since the current yield of a bond refers to the actual interest income produced by that bond relative to the bond's market (not par) price, the current yield of a 5% bond priced at 80 would be $50 / $800 = 6.25%.