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CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features

A bond pays a 6% annual coupon on a par value of 1,000 and is priced at 1,000 on its issue date. Which statement about the bond's current yield is most accurate?

The current yield equals the coupon rate of 6.0%. Current yield is annual coupon divided by price, so 60 divided by 1,000 gives 6.0%. It ignores reinvestment and redemption gains or losses, and with a bond priced at par it matches the coupon rate.

  1. AIt is equal to the coupon rate of 6.0%.Correct
  2. BIt is lower than the coupon rate because it ignores the redemption of par.
  3. CIt is higher than the coupon rate because it includes reinvestment income.

Explanation

Current yield equals annual coupon divided by price: 60/1,000 = 6.0%. When a bond trades at par, the current yield equals the coupon rate. It does not include reinvestment income, so the third option is wrong, and ignoring redemption does not lower it below the coupon at par.

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