Multiple choice

A bond of face value Rs. 5,000 carries a coupon interest rate of 12%. It is quoted in the market at Rs. 4,500. What is the current yield of the bond?

  1. 12%

  2. 10%

  3. 13.3%

  4. 14.2%
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Interest earned is Rs. 600 (5000 x 12%). Thus, current yield = 600/4500 x 100 = 13.3%

AI explanation

Current yield is calculated as the annual coupon payment divided by the bond's current market price, not its face value. Here the annual coupon is 12% of Rs. 5,000 = Rs. 600, and dividing that by the market price of Rs. 4,500 gives 600/4500 ≈ 13.3%. Because the bond trades below face value, its current yield (13.3%) is higher than its stated coupon rate (12%).

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