Question

If the annual interest rate printed on the face of a bond is 20 percent, the face value of the bond is $1,000, and you purchase the bond for $1,250, what is the current yield on the bond

Answer 1

Answer: 16%

Explanation:

Given the details in the above question, you can calculate the yield of a bond using the following formula:

= Par value of bond * Coupon rate/ Current price of bond

= 1,000 * 20% / 1,250

= 1,000 * 0.00016

= 0.16

= 16%

This makes sense because the bond is selling at a price above the face value of $1,000 which can only mean that the coupon rate is higher than the yield.