CIMA BA1 · Chapter 12 · Question 6 of 9
A bond with a nominal value of $100 pays an annual coupon of 6% and has a current market price of $80. What is its interest (running) yield?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 7.5%
Explanation
Interest yield = annual coupon / market price x 100 = $6 / $80 x 100 = 7.5%. Because the bond trades below nominal value, the yield exceeds the coupon rate. 6.0% is the coupon rate on nominal value, 4.8% wrongly multiplies the coupon rate by price / nominal value, and 32.5% wrongly adds the $20 discount to nominal value to the coupon ((6 + 20) / 80), confusing the running yield with a total return to redemption.
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