NISM Certifications · NISM-Series-XV: Research Analyst · Terminology in Equity and Debt Markets
A bond with a face value of Rs 1,000 pays an annual coupon of 8%. It is currently trading at Rs 800. What is its current yield?
The current yield is 10%. The annual coupon is Rs 80 (8% of Rs 1,000 face value), and dividing it by the market price of Rs 800 gives 10%. The coupon rate of 8% is based on face value, not market price.
- A8%
- B10%Correct
- C12.5%
- D6.4%
Explanation
Annual coupon = 8% of 1,000 = Rs 80. Current yield = coupon / market price = 80 / 800 = 10%. The 8% figure is the coupon rate, which uses face value as the base. 6.4% wrongly multiplies the coupon rate by the price ratio.
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