NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities
Which of the following best describes the current yield of a bond?
Current yield is the annual coupon divided by the bond's current market price. It ignores capital gain or loss at maturity and the time value of money. Coupon over face value is the coupon rate, and yield to maturity is the discount rate equating cash flows to price.
- AAnnual coupon divided by the current market priceCorrect
- BAnnual coupon divided by the face value
- CYield that equates the present value of all cash flows to price
- DCoupon plus capital gain divided by face value
Explanation
Current yield considers only the coupon income relative to the price paid today. Coupon over face value is the coupon rate. The rate equating discounted cash flows to price is yield to maturity. The last option is not a standard measure.
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