A bond has a 10% coupon rate, a par value of $1,000 and a market price of $800. What is the current yield of this bond?
To calculate the current yield of a bond, you need to know the bond's annual coupon payment and its market price. The formula for calculating current yield is:
Current Yield = (Annual Coupon Payment / Market Price) x 100%
In this case, the bond has a 10% coupon rate, which means it pays an annual coupon payment of 10% of its par value. The par value is $1,000, so the annual coupon payment is $100 (10% of $1,000).
The market price of the bond is given as $800.
Using the formula:
Current Yield = (Annual Coupon Payment / Market Price) x 100%
= ($100 / $800) x 100%
= 0.125 x 100%
= 12.5%
Therefore, the current yield of this bond is 12.5%.