Malik has been saving money for retirement but he is worried about the impact inflation may have on the value of his savings. He wants to purchase a…

The current yield of a bond measures the annual income (coupon payment) as a percentage of its current market price. It is calculated using the formula: Current Yield = (Annual Coupon Payment / Current Market Price).

First, calculate the annual coupon payment: Par Value × Coupon Rate = $10,000 × 6.75% = $675.

Next, divide the annual coupon payment by the current market price: $675 / $9,200 = 0.073369.

Finally, express this as a percentage: 0.073369 × 100 = 7.34% (rounded to two decimal places).

B. 6.75% is the coupon rate, which is the annual interest payment relative to the bond's par value, not its current market price.

C. 6.25% is an incorrect calculation. The bond is trading at a discount, so its current yield must be higher than its coupon rate.

D. 6.21% is an incorrect calculation. This value is lower than the coupon rate, which is impossible for a bond trading at a discount.

1. Bodie, Z., Kane, A., Marcus, A. J., Perrakis, S., & Ryan, P. J. (2019). Investments (9th Canadian ed.). McGraw-Hill Ryerson. Chapter 14, Section 14.2, "Bond Yields", p. 453. The text defines current yield as "the bond's annual coupon payment divided by its price."

2. Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Roberts, G. S. (2019). Corporate Finance (8th Canadian ed.). McGraw-Hill Ryerson. Chapter 7, "Bond Valuation", p. 205. The formula and definition for current yield are provided.