Current Yield

### What is the formula to calculate the current yield of a bond? - [ ] \\(\frac{\text{Current Market Price}}{\text{Annual Coupon Payment}}\\) - [ ] \\(\frac{\text{Annual Coupon Payment}}{{\text{Face Value}}}\\) - [x] \\(\frac{\text{Annual Coupon Payment}}{\text{Current Market Price}}\\) - [ ] \\(\frac{{\text{Face Value}}}{{\text{Annual Coupon Payment}}}\\) > **Explanation:** The correct formula for calculating current yield is the annual coupon payment divided by the bond's current market price. ### How would you interpret a bond with a high current yield? - [ ] The bond is selling at a premium. - [x] The bond is selling at a discount. - [ ] The bond’s capital gains potential is high. - [ ] The bond issuer is financially unstable. > **Explanation:** A high current yield often indicates that the bond is selling at a discount, meaning the market price is lower than the face value. ### What does the coupon rate represent? - [x] The annual interest rate paid on the bond’s face value. - [ ] The bond's annual return based on its current market price. - [ ] The bond's total return if held until maturity. - [ ] The interest rate on the bond minus inflation. > **Explanation:** The coupon rate is the annual interest rate paid on the bond’s face value by the issuer. ### Why might an investor prefer looking at current yield over yield to maturity? - [ ] To understand the bond's risk level. - [x] To get a real-time measure of the bond's income return. - [ ] To predict future interest rates. - [ ] To assess the issuer's creditworthiness. > **Explanation:** Investors may prefer current yield for a real-time measure of the bond’s income return based on its current market price. ### Which statement is true regarding current yield and coupon rate? - [ ] Current yield is always higher than the coupon rate. - [ ] Current yield and coupon rate are usually equal. - [x] Current yield can be either higher or lower than the coupon rate. - [ ] Current yield does not relate to the coupon rate. > **Explanation:** Current yield can be higher or lower than the coupon rate depending on the bond's current market price relative to its face value. ### What happens to the current yield if the bond's market price increases? - [x] The current yield decreases. - [ ] The current yield increases. - [ ] The current yield remains unchanged. - [ ] The current yield becomes zero. > **Explanation:** If the bond’s market price increases, the current yield decreases since the same annual coupon payment is now divided by a higher market price. ### Which of the following best describes a “face value” of a bond? - [x] The amount paid to the bondholder at maturity. - [ ] The bond’s current trading price in the market. - [ ] The bond’s annual interest payment. - [ ] The initial investment by the bondholder. > **Explanation:** The face value is the amount paid to the bondholder at maturity, also known as the par value. ### Current yield is most useful for comparing which types of securities? - [ ] Stocks - [x] Bonds - [ ] Mutual funds - [ ] Real estate > **Explanation:** Current yield is particularly useful for comparing the income return on bonds. ### Which aspect does current yield not account for? - [x] Potential capital gains or losses. - [ ] Annual income from interest payments. - [ ] Current market price of the investment. - [ ] Coupon rate. > **Explanation:** Current yield does not account for potential capital gains or losses, only the annual income from interest payments and current market price. ### What might a decreasing current yield indicate about the price of a bond? - [ ] The bond’s price is decreasing. - [x] The bond’s price is increasing. - [ ] The bond is approaching its maturity. - [ ] The bond’s coupon payments are being reduced. > **Explanation:** A decreasing current yield usually indicates that the market price of the bond is increasing.