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 9% and is currently trading at Rs 900. What is its current yield?
The current yield is 10.0%. The annual coupon is 9% of Rs 1,000, which is Rs 90, and dividing this by the market price of Rs 900 gives 10%. Using face value as the base would give only the 9% coupon rate, which is incorrect here.
- A9.0%
- B10.0%Correct
- C8.1%
- D11.1%
Explanation
Annual coupon = 9% x 1,000 = Rs 90. Current yield = 90/900 = 10.0%. 9.0% is the coupon rate (wrong base: face value). 8.1% results from dividing 90 by 1,110 or multiplying 9% by 0.9. 11.1% results from inverting the ratio, 1,000/900 x 10%.
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